ECON101 Lecture Notes - Lecture 3: Demand Curve

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purplecoyote711

10 Oct 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Elshan Alekbero

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ECON101 Full Course Notes

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Demand: responsiveness of qd to changes in price, formula: Closeness of substitutes: the more substitutes available the more elastic demand is, eg wants. Proportion of income spent: if proportion you spend is high, the more elastic the good is, e. g. , if prices of newspapers increase from sh. 50 to sh. 75, the elasticity of newspapers in inelastic. Qd so total revenue doesn"t change: note: ped is a units free measure which means either you have in kgs or liters it doesn"t matter when calculating elasticity. Immediate response is called the momentary supply where elasticity is perfectly inelastic. One cant produce more fast just because price is increasing. eg if the prices of corn rise, supplier of corn can"t increase supply soon so momentary supply is perfectly inelastic. Short run supply is when some factors of production can be altered such as labour.

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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

Comparative Advantage
Suppose Steve can specialize and produce either 1600 rugs and 0 paintings, or 0 rugs and 800 paintings; and Cindy can produce 250 rugs and 0 paintings, or 0 rugs and 1000 paintings, and assuming constant opportunity costs:

State which person has a comparative advantage in rugs. Explain why.

Using your answer in part a, if the terms of trade are 3 rugs = 2 paintings, and Steve

initially produces 900 rugs and 350 paintings, and Cindy initially produces 175 rugs and 300 paintings, what are the gains from specialization and trade to each person if Steve trades 600 units of the good he has a comparative advantage in?

Supply and Demand

Given QD = 800 â 2P and QS = 2P + 100, what is the market equilibrium price (P*) and

quantity (Q*)?

Suppose a change occurs in the market such that QDâ = 660 â 2P and QSâ= 2P + 100.

Calculate the new market equilibrium price (P**) and quantity (Q**).

Elasticity

From your answers in the supply and demand question above, use the mid-point

formula to calculate the price elasticity of supply (to two decimal places).

Using your answer in part a, is the price elasticity of supply elastic, inelastic or unit

elastic?

State how you were able to determine if the price elasticity of supply is elastic, inelastic

or unit elastic.

salmonwombat608

ECON101 Lecture Notes - Lecture 3: Demand Curve

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