ECO100Y5 Lecture Notes - Lecture 2: Deadweight Loss, Black Market, Price Controls

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2 Sep 2016

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Elasticity: a measure of how much one economic variable responds to changes in another economic variable. Price elasticity of demand: a measure of the responsiveness of quantity demanded to a change in the commodity"s own price. Elastic demand: the percentage change in quantity is greater than the percentage change in price (elasticity greater than 1) Inelastic demand: the percentage in quantity demanded is less than the percentage change in price in price (elasticity less than 1) Unit elastic demand: the percentage change in quantity demanded is equal to the percentage change in price (elasticity is equal to 1) Elasticity of demand and supply: availability of close substitution. A product with more substitutes have more elastic demand. A product with fewer substitutes have less elastic demand: passage of time. When more time passes, the more elastic the demand for a product becomes because it takes consumers some time to adjust their buying habits.

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.

If the percentage change in the quantity demanded of a good is less than the percentage change in price, the price elasticity of demand is:

A) Elastic

B) Inelastic

C) Perfectly inelastic

D) Unitary elastic