You just opened a flower shop and are trying to understand pricing issues. You were told that elasticities are very important in determining prices and what products to supply, so you decide to investigate this concept.

You call your friend, an economics professor, and ask, “What is the price elasticity of demand? What determines it? What is elastic and inelastic demand?”

To really understand it, compute the following price elasticities of demand:

• The price of a laptop increases by 20% and there is a      40% drop in the quantity demanded.
• The price of a pack of cigarettes increases by 10% and      there is a 5% drop in the quantity demanded.
• The price of water increases by 15% but there is no      drop in the quantity demanded.

Of the above examples, which is more elastic, and which is the least elastic? Why? Answer the following questions:

• Why is elasticity an important concept for a      business? What if national income went up? How would that affect      elasticity?
• What is the price elasticity of supply? What determines      it?
• Compute the following price elasticities of supply: 

  The price of a hotel room increases by 20%,       and the quantity supplied increases by 10%.
  The price of health care goes up by 50% ,       and the quantity supplied increases by an equal amount.
  The price of a book increases by 10%, and the quantity       supplied increases 20%.
  In the above examples, which is more elastic and which       is the least elastic? Why?

• What kind of supply and demand elasticities would the      following goods have, and why? 

  Bridge tolls
  Beachfront properties
  Gourmet coffee
  Luxury automobiles
  Gasoline
  Cell phones
  Computers
  College tuition

Now that you are an expert on elasticities, what do you think would be the best time of year to raise prices, and why? What do you think the elasticities are in the flower business? Use graphs and hypothetical tables to support your answer.

800–1,200 words plus graphs