Economics 1021A/B Lecture 5: Lecture 5 (Chapter 4)

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25 Aug 2016

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Price elasticity of demand = percentage change in quantity demanded. This measures the responsiveness of the change in a demand of a product when the price of this product changes, assuming all other influences stay the same. We find the nominator and denominator by calculating averages for demand and price. The original price plus the new price, divided by 2, then put the difference between original and new over that average. If the quantity demanded does not change when the price changes then then it is called a perfectly inelastic demandelasticity = 0. If the percentage change of price and demand are equal, the elasticity = 1. And good within the range of these two: 0 to 1 is said to have an inelastic demand. If the quantity demanded changes by an infinity large percentage for every tiny price change, it is said to have a perfectly elastic demand.

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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.

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

coffeeelephant81

Address the following:

Price elasticity of demand refers to the percentage change in demand resulting from a percentage change in price.

Please review the definition of relative inelasticity and relative elasticity. These terms refer to how much demand changes based on a change in price.

1) Choose any three products and classify and describe their price elasticity of demand; (relatively inelastic, relatively elastic, perfectly elastic, perfectly inelastic, or unitary elastic; your three product should illustrate different elasticities; ie: do not chose two relatively inelastic products)

2) Discuss what happens to the demand when the price changes for each of your items, specifically how much does demand change when the price changes?

3) Explain why demand changes the way it does for each of your three products

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Economics 1021A/B Lecture 5: Lecture 5 (Chapter 4)

ECON 1021A/B Full Course Notes

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