ECON101 Lecture Notes - Lecture 3: Normal Good, Inferior Good

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browncrocodile545

23 Sep 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Corey Van De Waal

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The income elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in consumer income when all other influences on buying plans remain the same. % change in the quantity demanded / % change in income. The change in income (m) is expressed as a % of the average income. Em = ( q / average q) / ( m / average m) The percentage increase in the quantity demanded is greater than the percentage increase in income. The percentage increase in the quantity demanded is greater than zero but less than the percentage increase in income. The quantity demanded remains the same as income increases. Normal goods: if em > 1 demand is income elastic and the good is a normal good, if 0 < em < 1 demand is income inelastic and the good is normal good. Inferior goods: if em < 0 good is an inferior good.

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interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

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point elasticity

price effect

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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

42) Which one of the following must be true if demand is income elastic? A) A small percentage increase in income will result in a large percentage increase in quantity demanded. B) A percentage change in price will lead to a larger percentage change in quantity demanded. C) The good is an inferior good. D) An increase in income will decrease the quantity demanded. E) A large percentage increase in income will result in a small percentage increase in quantity demanded.

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 Notes - Lecture 3: Normal Good, Inferior Good

ECON101 Full Course Notes

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