Economics 1021A/B Lecture Notes - Lecture 3: Cowhide, The Surplus, Demand Curve

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ECON 1021A/B Full Course Notes

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Why does a higher price reduce the quantity demanded: substitution effect: when the price of a good rises, other things remaining the same, its relative price rises. Although each good is unique, it has substitutes. Faced with a higher price and an unchanged income, people cannot afford to buy everything they previously bought. They must decrease the quantities demanded of some. Normally, the good whose price has increased will be one of the goods that people buy less of. A substitute is a good that can be used in place of another good. If the price of a substitute rises, people buy less of the substitute and more of the other good. A complement is a good that is used in conjunction with another good. Anna sun 23 september 2012 2 donut, a complement of coffee, rises, people buy less coffee: expected future prices. If you expect future prices to rise, your current demand increases.

Related Questions

The law of demand says that the lower the price of good, other things constant is?

a) the smaller demand for that good.

b) the larger demand for that good.

c) the smaller the quantity demanded that good.

d) the larger the quantity demanded that good.

e) the smaller the real income of consumers and the lower the quantity demanded that good.

redbeaver161

20) The law of demand states that, other things remaining the same, A) price and quantity supplied are positively related. B) the higher the price of a good, the smaller is the quantity demanded. C) as income increases, willingness to pay for the last unit increases. D) the higher the price of a good, the greater is the quantity demanded. E) the higher the price of a good, the smaller is the quantity supplied.

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.

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Economics 1021A/B Lecture Notes - Lecture 3: Cowhide, The Surplus, Demand Curve

ECON 1021A/B Full Course Notes

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