ECON 1000 Lecture Notes - Lecture 2: Demand Curve, Farad, Economic Equilibrium

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6 May 2019

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Causality -> y=f(x) - if x change -> y change. Demand of buyer - if you want to buy goods or service - you demand it. If we have a price change, we have a quantity of demand change. Q = q(p) - direct demand function (i. e. q = a-bp) Demand curve shows the relationship between the quantity demanded of a good and its price. Income: the price of related goods (substitutes, expected future prices, expected future income and credit, population, preferences. A complement is a good that is used in conjunction with another good. Change in quantity demanded can occur only due to change in price. The firm: has the resources and technology to produce it, can profit from producing it, has made a definite plan to produce and supply it. When the price is high, quantity supplied increase, when the price is low, quantity supplied decrease.

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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. Managerial economics can best be defined as the:

Select one:

a. macroeconomics and microeconomics for managers.

b. analysis of the labor market through the behavior of workers and managers.

c. analysis of major management decisions using economic tools.

d. study of economic incentives on consumer behavior and demand.

e. study of the strategic interaction between firms in a market.

2. The price elasticity of demand is defined as the ratio of the _____ other factors held constant.

Select one:

a. change in the price of a good to the change in the total revenue

b. percentage change in quantity demanded to the percentage change in the price of a competitorâs good

c. percentage change in quantity demanded to the percentage change in price

d. percentage change in the price of an input to the percentage change in the price of the good

e. percentage change in price of the good to the percentage change in the consumersâ income

3. According to the law of demand, if a firm reduces the price of its good:

Select one:

a. the quantity of goods produced and sold by the firm will decline.

b. competing firms will reduce prices.

c. some consumers will exit the market.

d. consumers in the market will demand more units of the good.

e. consumers will demand fewer units than before the price cut.

4. Other factors constant, a change in _____ will cause a shift in a firm's demand curve.

Select one:

a. the quantity of the good offered for sale

b. the price of the good or service

c. the wages paid to labor employed

d. the general income level of consumers

e. the technology used in the production of the good or service

apricotleopard382

The generalized demand and supply functions for good X are

Qd = 10 -2Px - 4P_Y + M Qs = 10 + 2P_X

Where:

Q_D = quantity demanded of good X

P_X = price of good X

M = consumer income

P_Y = price of good Y

Q_S = quantity supplied of good X

P_X = price of good X

A. Are good X and good Y substitutes or complements? Why?

B. Is good X a normal good or an inferior good? Why?

C. What is the demand function when P_Y = $4 and M = $600?

d. Use the demand function you found in part c. and solve for the equilibrium price (P_o) and the equilibrium quantity (Q_o).

e. Find the inverse demand function and the inverse supply function.

f. Sketch this market.

periwinklechimpanzee73

ECON 1000 Lecture Notes - Lecture 2: Demand Curve, Farad, Economic Equilibrium

ECON 1000 Full Course Notes

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