🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
HomeClass Notes1,200,000US530,000

ECON 2010 Lecture Notes - Lecture 8: Inferior Good, Normal Good

38 views6 pages
Verified Note
School
CU-Boulder
Department
Economics
Course
ECON 2010
Professor
Christian Hennigan

For unlimited access to Class Notes, a Class+ subscription is required.

ECON 2010 verified notes
8/47View all
7

ECON 2010 Lecture Notes - Lecture 7: Breakfast Cereal, Midpoint Method, Sunscreen

8

ECON 2010 Lecture Notes - Lecture 8: Inferior Good, Normal Good

9

ECON 2010 Lecture Notes - Lecture 9: Price Ceiling, Price Floor, Price Controls

Ch. 5 Elasticity & Its Application
Wednesday, September 12, 2018
10:02 AM
Price Elasticity and Total Revenue
Total Revenue (TR) = P x Q
Expenditure = P x Q
• Price increase has 2 effects on revenue:
o Higher revenue: bc of the higher P
o Lower revenue: you sell fewer units (lower Q)
• Price increase, if a demand is elastic:
o E>1: % change in Q>% change in P
o TR decreases: the fall in revenue from lower Q> the increase in revenue from
higher P
• For a price increase, if a demand is inelastic:
o E<1: % change in Q<% change in P
o TR increases: the fall in revenue from lower Q < the increase in revenue from
higher P
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in
Ch. 5 Elasticity & Its Application
Wednesday, September 12, 2018
10:02 AM
Price Elasticity of Supply
• Price elasticity of supply: how much the quantity supplied of a good responds to a
change in the price of that good
o % change in quantity supplied
% change change in price
o Measures sellers' price-sensitivity
• Variety of supply curves
o Supply is unit elastic
▪ Price elasticity of supply = 1
o Supply is elastic
▪ Price elasticity of supply > 1
o Supply is inelastic
▪ Price elasticity of supply < 1
o Supply is perfectly inelastic
▪ Price elasticity of supply = 0
▪ Supply curve is vertical
o Supply is perfectly elastic
▪ Price elasticity of supply = infinity
▪ Supply curve is horizontal
• The flatter the supply curve, the greater the price elasticity of supply
• Magnitude of the change in quantity is greater than the change in supply
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Price elasticity of supply: price elasticity of supply: how much the quantity supplied of a good responds to a change in the price of that good, % change in quantity supplied. In the long run: firms can build new factories, or new firms may be able to enter the market. Normal good: any good for which demand increases when income increases (i. e. with positive income elasticity of demand) Inferior good: any good for which demand declines when income rises a. Income elasticities of demand: how much the quantity demanded of a good responds to a change in comsumers" income, % change in quantity demanded, divided by the percentage change in income, normal goods: income elasticity > 0. Increase of price of beef causes an increase in demand for chicken: complements: cross-price elasticity < 0. Increase in price of computers causes decrease in demand for software.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents

ECON 2010 Lecture 12: Total Revenue
ECON 2010 Lecture Notes - Lecture 5: Root Mean Square, Normal Good, Breakfast Cereal
taupehare155
ECON 2010 Lecture Notes - Lecture 13: Inferior Good, Luxury Goods
fuchsiasheep454

Related Questions

From the scenario for Katrina’s 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: %ΔTR = %ΔQ + %ΔP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Δ in TR if ED is -.85 and the %ΔP is 10%?

1. Clothing retailers often use sales, where some or all products are sold at a discount price, to increase revenue. What does this suggest about the price elasticity of demand for retail clothing?

A) It is elastic.

B) It is inelastic.

C) It is unit elastic.

D) This tells us nothing about elasticity.

2. If demand is inelastic, then increasing price will do what to revenue?

A) It is impossible to say.

B) Decrease

C) Increase

D) Nothing will happen to revenue.

3. If P increases from 200 to 202 and Qd decreases from 50 to 49, what is the price elasticity of demand? ___

4. If elasticity (i.e. price elasticity of demand) is -3, a 1.5% increase in price would lead to what change in quantity demanded?

A) a decrease of 3%

B) a decrease of 4.5%

C) an increase of 1.5%

D) an increase of 3%

5. If you know that the demand curve is given by: Q = 20-2P What is the price elasticity of demand if P = 4?

A) -0.666

B) -0.33

C) -1.33

D) -1.66

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.