ECON 1B03 Lecture Notes - Lecture 5: Substitute Good, Toonie

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periwinkleskunk665

17 Oct 2018

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●Supply curve is horizontal any price change will affect Qs infinitely

●Example: there is no real world example. It would be a good that had many perfect substitutes

in production and one that the unit cost of production didn’t change regardless of how many

were produced.

Unit Elastic Supply

●Es = 1

●A percentage change in P is

exactly offset by a percentage

change in Qs

●Example: thee isn’t really one.

Think of unity elasticity as the

cutoff point between elastic and

inelastic supply

Some Generalities About Supply Elasticities and their Determinants

1. A key determinant of supply elasticity is time

●Supply is usually more elastic in the long run than in the short run

●Firms can respond more easily in the longer term than they can in the short run

2. Goods whose factors of production are readily available have more elastic supply

●You can easily obtain more resources to produce more good is the selling price rises and

you want to increase input

3. Goods whose factors of production are mobile tend to have more elastic supply

●You can move resources to other tasks to adjust quantity produced

4. Goods with non-complicated production processes tend to have elastic supply

a. If price changes, the production plan can be easily changed to accommodate the firm’s

changing output decision

5. Goods that can be easily stored tend to have more elastic supply

a. A firm can significantly increase production if it has a place to store its output

Note: just like demand, the flatter the supply curve the more elastic is the supply of the good.

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Related Questions

1. Explain the law of diminishing marginal utility, and give an example to illustrate it.

2. If demand is elastic and price is raised, what happens to total revenue? Can you prove this?

3. Estimate your elasticity of demand for (a) gasoline; (b) cigarettes; (c) video rentals.

4. Why is industry supply more elastic in the long run than in the short run, and more elastic in the short run than in the market period?

5. How do the relative elasticities of demand and supply affect the relative tax burdens of the buyer and the seller?

6. What are the major determinants of the elasticity of demand?

pinkgerbil745

Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand:

• Number of substitutes

• Whether the good is a necessity or a luxury

• Percentage of one's budget spent on the good

• Time horizon being considered

A. A good with many close substitutes is likely to have relatively ___________ demand since consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

B. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

1. Chemotherapy for cancer patients

2. Yacht

The price elasticity of demand for good also depends on how you define the good.

C. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

1. Beverages

2. Merlot

3. Wine

D. The price elasticity of demand is also affected by the given time horizon. Other things being equal, the demand for natural gas will tend to be _________ elastic in the short run than in the long run.

browngoat320

1. Suppose that a 10% increase in the wage results in a 5% reduction in employment. In this case, labor demand is said to be:

A. elastic

B. inelastic

C. unit elastic

2. Which of the following best explains why elasticity varies along a linear demand curve?

A. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) while the percentage change in wage increases.

B. As the quantity of labor demanded rises, the percentage change in quantity demanded rises (for a given change in labor use) as does the percentage change in the wage.

C. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) as does the percentage change in the wage.

D. As the quantity of labor demanded rises, the percentage change in quantity demanded declines (for a given change in labor use) while the percentage change in wage decreases

3. Labor demand is more elastic when:

A. the substitution effect resulting from a wage change is larger

B. the scale effect resulting from a wage change is larger

C. both are correct

D. none of the above

4. The scale effect associated with a change in the wage is larger when:

A. the demand for the final product is more elastic

B. labor costs are a smaller share of total costs

C. there are many close substitutes for this category of labor

D. economics of scale are present in the production of the good

5. The price elasticity of demand for the final products affects the own-wage elasticity of demand for labor by affecting the magnitude of:

A. the substitution effect that occurs in the labor market

B. the scale effect that occurs in the labor market

C. both substitution and scale effects

D. neither substitution nor scale effects

6. Unions are expected to attempt to:

A. make it more difficult to replace labor with other resources

B. reduce the elasticity of demand for the final product

C. support laws that reduce the elasticity of supply of other resources

D. all of the above.

E. none of the above

7. Unions are likely to be less successful in negotiating higher wages in those labor markets in which:

A. the demand for the final product is more elastic

B. there are few close substitutes for union workers

C. the price elasticity of supply for other factors of production is relatively high

D. labor costs comprise a small share of total costs

browncoyote590

ECON 1B03 Lecture Notes - Lecture 5: Substitute Good, Toonie

ECON 1B03 Full Course Notes

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