ECON1130 Lecture Notes - Lecture 6: Arc Elasticity, Inferior Good, Normal Good

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2 Feb 2017

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Demand is inelastic when elasticity < 1. Demand is elastic when elasticity > 1. Demand is unit elastic when elasticity = 1. Extreme cases of elasticity: when elasticity = 0 then demand is perfectly inelastic, when elasticity is = infinity then demand is perfectly elastic. Tr = p x q: p and q move in opposite directions, total revenue will follow the dominant change of p and q. If p dominates, tr will follow the direction of p. If q dominates, tr will follow the direction of q. How quantity demanded responds to the changes in income. Measure arc elasticity (percentage change approach) A measure of responsiveness of quantity supplied to a change in one factor affecting supply: here we care about price and the price changing and the effect that it will have on supply. Price elasticity of supply: how quantity supplied responds to a change in price: same equation as demand.

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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%?

lilaccattle807

5. The demand curve for a product is given by Qdx = 1,000 - 2Px + .02Pz where Pz = $400. (Hint: If you're not comfortable with the calculus alternatives, compute Q at the given prices, then again with a 1% increase in price. Then figure percentage change in Q over the percentage change in P, %Q/%P).

a. What is the own-price elasticity of demand when Px = $154? Is the demand elastic or inelastic? What would happen to the firm's revenue if it decided to charge a price below $154?

b. What is the own-price elasticity of demand when Px = $354? Is the demand elastic or inelastic? What would happen to the firm's revenue if it decided to charge a price below $354?

c. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are good X and good Z substitutes are complements?

byzantiumimpala385

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.

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ECON1130 Lecture Notes - Lecture 6: Arc Elasticity, Inferior Good, Normal Good

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