ECON 040 Lecture Notes - Lecture 20: Reservation Price, Shortage, Economic Surplus

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taupesardine275

30 Dec 2020

School

College of The Sequoias

Department

Economics (ECON)

Course

ECON 040

Professor

kasun

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Document Summary

Elasticity of demand: measures the responsiveness of the quantity demanded because of a change in price. *price elasticity is usually negative; however, we take the absolute value. Demand is unit elastic if the price elasticity equals 1. Demand is inelastic if the price elasticity is < 1. Demand is elastic if the price elasticity is > 1. Demand is perfectly inelastic if price elasticity is undefined/infinite. (vertical) Demand is perfectly elastic if price elasticity equals 0. (horizontal) Availability of substitutes: the larger the number of substitutes, the more elastic demand tends to be. Definition of a good: the more specific we define a good the more elastic it will be as there are more substitutes, the broader we define a good the more inelastic it will be. Income share: the larger the share of income required to purchase a good, the higher the elasticity as consumers notice proportional changes in prices of higher price items compared to lowers ones.

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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. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

The availability of close substitutes
Whether the good is a necessity or a luxury
How broadly you define the market
The time horizon being considered

A good without any close substitutes is likely to have relatively inelastic or elastic demand since consumers cannot easily switch to a substitute good if the price of the good rises?

2. 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?

a. Diamond necklace

b. Amputation procedures for diabetes sufferers

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

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.

Categories:	Most Elastic	In Between	Least Elastic
Food
Red bell peppers
Vegetables

4. The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the gasoline demand is _______ elastic in the short run than in the long run.

a. less

b. more

c. no more, no less

bluepanda480

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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ECON 040 Lecture Notes - Lecture 20: Reservation Price, Shortage, Economic Surplus

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