ECON 101 Lecture Notes - Lecture 17: Normal Good

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skywildebeest541

22 Dec 2020

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Demand curves shift because of changes in income and change of prices of related goods. We can best measure how demand of a good is affected by prices of related goods using cross- price elasticity of demand. Can measure how demand is affected by changes in income using the income elasticity of demand. Cross-price elasticity of demand: measures the effect of the change in one good"s price on the quantity demanded of the other good. Ratio of percent change in the quantity demanded of one good to the percent change in the price of the other. % change in quantity demanded of a / % change in price of b. When two goods are substitutes, cross-price elasticity of demand is positive. Positive change in price (rise in price) of one good, raises the demand for its substitute. If close substitutes the cross-price elasticity will be large and positive: if not, positive and small.

Related Questions

When the price of good A rises from $180 to $220, the quantity of good A demanded decreases from 250 to 150 units a day, and the quantity of good C demanded increases from 75 to 125 units a day.

From this information, we can determine that _______.

A. the cross elasticity of demand is positive, so the two goods are substitutes

B. the goods are complements because as the price of good A changes so does the quantity demanded of good C

C. good C is a normal good because as the price of good A rises, people switch to good C

D. the cross elasticity of demand is less than 1, so the two goods are substitutes

orchidbee10

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.

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

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ECON 101 Lecture Notes - Lecture 17: Normal Good

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