CAS EC 101 Lecture Notes - Lecture 8: Normal Good, Laser Printing

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4 Oct 2018

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CAS EC 101 Lecture Notes - Lecture 7: Demand Curve

CAS EC 101 Lecture Notes - Lecture 8: Normal Good, Laser Printing

CAS EC 101 Lecture Notes - Lecture 9: Indifference Curve

Document Summary

Availability of close substitutes: demand for a good with close substitutes is more elastic. Passage of time: longer the period of time, the more elastic is demand. Luxuries vs. necessities: demand for luxuries is more elastic than demand for necessities. Definition of the market: broader the definition of a good, less elastic the demand. Share of a good i(cid:374) a (cid:272)o(cid:374)su(cid:373)er"s (cid:271)udget: demand for a good will be more elastic the larger the share of the good in the average (cid:272)o(cid:374)su(cid:373)er"s (cid:271)udget. Measures the response of demand for one good to changes in price of another good. = % change in qd for good one / % change in price of good 2. For substitutes, cross price elasticity > 0. Increase in price of beef causes an increase in demand for chicken. For complements, cross price elasticity < 0. Increase in price of computers causes decrease in demand for software. When its zero, the 2 goods have no relation.

Related Questions

Explain why the demand for the good or service provided by a firm is elastic or inelastic. How does the elastic or inelastic demand influence pricing decisions by the firm to maximize profit? What are the impacts of elastic demand and inelastic demand on total revenue?

Provide examples of how the availability of close substitutes affects the price elasticity of demand for a good or service.

Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

salmonlouse248

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.

Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand:

• Number of substitutes

• Whether the good is a necessity or a luxury

• Percentage of one's budget spent on the good

• Time horizon being considered

A. A good with many close substitutes is likely to have relatively ___________ demand since consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

B. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

1. Chemotherapy for cancer patients

2. Yacht

The price elasticity of demand for good also depends on how you define the good.

C. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.