ECON 1B03 Lecture Notes - Lecture 4: Demand Curve, Normal Good, Inferior Good

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21 May 2018

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Elastic

- With an elastic demand curve, a decrease in the price leads to an increase in quantity

demanded that is proportionally larger

- A firm would gain so many sales that even with a lower price, it ends up with greater total

revenue

- The gain to TR from the Quantity increase will outweigh the loss in TR from the lower price

- TR will irease if Prie↓ if dead is elasti

- so if a firs wats to ↑ TR ad dead for its good is elastic, it should ↓ Price

Unit Elastic: if demand is unit elastic, the gain to TR fro a Prie ↑/↓ will e eatl offset  the

↑/↓ i Quatit

- TR will ot icrease if P↑

- TR will ot icrease if P↓

- No chage i price will ↑ TR

- TR must be at a maximum when Ep = 1

Some Elasticities of Demand

- Bread = 0.15

- Clothing = 0.49

- Motor vehicles = 1.14

- Restaurant meals 2.27

Other Demand Elasticities

Income Elasticity of Demand

- Income elasticity of demand: measures how much the quantity demanded of a good responds

to a change in consumers income

- It is computed as the % change in quantity demanded/ % change in income

- Income elasticity is denoted EN

- If we are given percentage changed in income and the corresponding changed in Qd, we use the

formula

- If we are given 2 levels of income and their corresponding Qd, we have to calculate the

percentage changes in Qd and Income

Here, the + and – signs matter

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With an elastic demand curve, a decrease in the price leads to an increase in quantity demanded that is proportionally larger. A firm would gain so many sales that even with a lower price, it ends up with greater total revenue. The gain to tr from the quantity increase will outweigh the loss in tr from the lower price. Tr will i(cid:374)(cid:272)rease if pri(cid:272)e if de(cid:373)a(cid:374)d is elasti(cid:272) so if a fir(cid:373)s wa(cid:374)ts to tr a(cid:374)d de(cid:373)a(cid:374)d for its good is elastic, it should price. Unit elastic: if demand is unit elastic, the gain to tr fro(cid:373) a pri(cid:272)e / will (cid:271)e e(cid:454)a(cid:272)tl(cid:455) offset (cid:271)(cid:455) the. No cha(cid:374)ge i(cid:374) price will tr. Tr must be at a maximum when ep = 1. Income elasticity of demand: measures how much the quantity demanded of a good responds to a change in consumers income. It is computed as the % change in quantity demanded/ % change in income.

Related Questions

From the scenario for Katrinaâs Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ÎTR = %ÎQ + %ÎP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Î in TR if ED is -.85 and the %ÎP is 10%?

lilaccattle807

1. Assume a monopoly has the following demand schedule:

Price (P) Quantity (Q)

$20 200

15 300

10 500

5 700

(a) Calculate total revenue (TR) at each P and Q combination.

(b) Calculate marginal revenue per unit for each decrease in price.

(c) For the change in price from $20 to $15, calculate the interval elasticity of demand. Is demand elastic or inelastic?

(d) For the change in price from $20 to $15, obtain the Lerner index.

aquamarinetiger116

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

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ECON 1B03 Lecture Notes - Lecture 4: Demand Curve, Normal Good, Inferior Good

ECON 1B03 Full Course Notes

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