ECN 104 Lecture Notes - Margarine, Negative Number

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blushfrog753

2 Jul 2018

School

Ryerson University

Department

Economics

Course

ECN 104

Professor

Tsogbadral Galaabaatar

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Chapter 5 - Elasticity and Its Application

Price Elasticity of Demand and Its Determinants

●Law of demand → as price goes up, quantity demanded goes down.

●Elasticity → a measure of the responsiveness of quantity demanded or quantity

supplied to a change in one of its determinants.

●Price elasticity of demand → measures how much quantity demanded responds to a

change in price.

● Demand is said to be elastic if quantity demanded responds substantially to changes in

the price, and inelastic if it responds only slightly.

Determinants

●Availability of Close Substitutes → goods with close substitutes have a more elastic

demand because it is easier for consumers to switch to the substitute. Ex. butter and

margarine, coke and pepsi.

●Necessities versus Luxuries → necessities tend to have inelastic demand, while luxuries

have an elastic demand. Ex. visits to the doctor versus abroad vacations.

●Definition of the Market → narrowly defined markets tend to have a more elastic demand

than broadly defined markets because it is easier to find substitutes for narrowly defined

goods. Ex. food has no substitute, but vanilla ice cream does.

●Time Horizon → goods tend to have more elastic demand over longer time horizons.

Computing the Price Elasticity of Demand

● The answer will always be a negative number because of the inverse relationship

between demand and price, but we drop the (-).

The Midpoint Method

● Avoids the issue of having the elasticity of point A to point B be different to the elasticity

of point B to point A.

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Document Summary

Law of demand as price goes up, quantity demanded goes down. Elasticity a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants. Price elasticity of demand measures how much quantity demanded responds to a change in price. Demand is said to be elastic if quantity demanded responds substantially to changes in the price, and inelastic if it responds only slightly. Availability of close substitutes goods with close substitutes have a more elastic demand because it is easier for consumers to switch to the substitute. Necessities versus luxuries necessities tend to have inelastic demand, while luxuries have an elastic demand. Ex. visits to the doctor versus abroad vacations. Definition of the market narrowly defined markets tend to have a more elastic demand than broadly defined markets because it is easier to find substitutes for narrowly defined goods. Ex. food has no substitute, but vanilla ice cream does.

Related Questions

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
Provide examples on how the availability of close substitutes affects price elasticity of demand.
Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

coffeehornet269

For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand.

a. Total revenue decreases when the price increases.

b. The additional revenue generated by an increase in quantity sold is exactly offset by revenue lost from the fall in price received per unit.

c. Total revenue falls when output increases.

d. Producers in an industry find they can increase their total revenues by coordinating a reduction in industry output.

e. As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer?

f. After Malia's income increased from $12,000 to $18,000 a year, her purchases of album downloads increased from 10 to 40 downloads a year. Calculate Malia's income elasticity of demand for albums.

g. Expensive restaurant meals are income-elastic goods for most people, including Sanjay. Suppose his income falls by 10% this year. What can you predict about the change in Sanjay's consumption of expensive restaurant meals?

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ECN 104 Lecture Notes - Margarine, Negative Number

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