ECON 1000 Lecture Notes - Lecture 28: Demand Curve

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We measure the influence of a change in the price of a substitute or complement by using the concept of the cross elasticity of demand. The cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same. We calculate the cross elasticity of demand by using the formula: cross elasticity of demand percentage change in quantity demanded/ percentage change in price of a substitute or complement. It is positive for a substitute and negative for a complement. Suppose that the price of pizza is constant and people buy 9 pizzas an hour. Then the price of a burger rises from . 50 to . 50. No other influence on buying plans changes and the quantity of pizzas bought increases to 11 an hour.

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Question 3. Netflix to Offer Online Movie Viewing Online movie rental service Netflix introduced a new feature Tuesday to allow customers to watch movies and television series on their personal computers. ... Netflix has been competing with video rental retailer Blockbuster, which has added an online rental service to the in-store rental service. CNN, January 16 2007 a. How will the offering of online movie viewing influence the price elasticity of demand for in-store movie rentals? (1 point) The price elasticity of demand for store rental movies will increase because online movie viewing is another substitute for renting movies. b. Would the cross elasticity of demand for online movies and in-store movie rentals be negative or positive? Explain. (1 point) Online movies and in-store rental movies are substitutes, so their cross elasticity of demand is positive. c. Would the cross elasticity of demand for online movies with respect to high-speed internet service be negative or positive? Explain. (1 point) Online movies and high-speed Internet service are complements, so their cross elasticity of demand is negative.

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.

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From the scenario for Katrinaâs Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ÎTR = %ÎQ + %ÎP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Î in TR if ED is -.85 and the %ÎP is 10%?

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ECON 1000 Lecture Notes - Lecture 28: Demand Curve

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