ECON101 Lecture 4: Elasticity of Demand

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29 Jun 2017

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Emanuel Charvalo

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Background: the quantity demanded for commodity responds to the change in the price of the commodity. Demand can also respond to a change in income and to a change in the price of other related commodities. Purpose of elasticity of demand is to measure the responsiveness of demand to a change in: price of the commodity. If per capita income goes up by 20%, will demand for a particular commodity increase by. Three forms of elasticity of demand: price elasticity of demand (ep) Income elasticity of demand (ey: cross elasticity of demand (exy) Price elasticity of demand (ep): measures a responsiveness of quantity demanded to a change in the price of the commodity. Ep = % change in quantity demanded / % change in price of commodities. 1. the price elasticity of demand is more elastic given the availability of closeness of substitutes of the commodity. Example: coca-cola price of commodity goes up, the quantity demanded will decrease signi cantly.

Related Questions

1. The price elasticity of demand for a commodity is -2. If the quantity demanded for the commodity increased by 10 percent, then the price

a. increased by 5 percent.

b. decreased by 5 percent.

c. increased by 10 percent.

d. decreased by 10 percent.

2. If income doubles and the quantity demanded of automobiles more than doubles, then automobiles can be described as a

a. substitute good.

b. complement good.

c. necessity.

d. luxury.

3. If market demand for owner-occupied housing is elastic, an increase in price will cause the total spending (price times quantity) to

a. rise.

b. fall.

c. remain unchanged.

d. change in a way that cannot be determined.

Please review the following work and correct me if I have mixed up the concepts of movements and shifts of supply and demand curves. Feel free to copy and edit/correct my mistakes. I'll be waiting. Thanks in advance!!

Changes in price dictate movements along demand curves. When a decrease in demand or the quality demanded occurs it's a safe bet that it's correlated to a price increase, which in turn leads to a resultant surplus of that particular commodity in the marketplace. This is because decreased demand means less of that commodity being sold. On the other hand, a price decrease usually leads to an increase in the demand for a particular commodity, or an increase in sales, which in turn leads to a shortage of that commodity in the marketplace.

To shift the demand curve itself, changes need to occur in other aspects of the market beyond simply a change in the price of a commodity. For example, an increase in income means the consumers have more disposable income. With more disposable income, demand for commodities will increase, and results in a shift of the demand curve itself. In this example, the demand curve would shift right. On the opposite side of the coin, cost increases due to production or losses in efficiency may decrease the side of supply, shifting the demand curve to the left.

Analogous to shifts in the demand curve, shifts along a supply curve occur when prices change as well. When the cost to produce a commodity increases, supply drops, and the supply curve shifts to the left. If the cost of production drops, and supply increases, the supply curve shifts to the right as demand develops.

Pharmaceutical supply and demand is an easy way to understand these concepts.

Drug demand increases: Price decreases, supplies decrease.

Drug demand decreases: Price increases, supplies increase.

Drug supply increases: Production costs drop, demand drops.

Drug supply decreases: Production costs increase, demand increases.

"But where and how do movements and shifts occur in the above?"

purpleworm770

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.

ECON101 Lecture 4: Elasticity of Demand

ECON101 Full Course Notes

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