ECON 22060 Lecture Notes - Lecture 7: Luxury Goods, Inferior Good, Normal Good

42 views2 pages

plummuskrat399

1 May 2017

School

Kent State University

Department

Economics

Course

ECON 22060

Professor

Thomas Sahajdack

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

Document Summary

Elasticity: ho(cid:449) (cid:862)responsi(cid:448)e(cid:863) are (cid:449)e to price. P decreases by 10%, q increases by 5% P decreases by 10%, q increases by 30% Elastic- the quantity changes by more than the price, in terms of percent. Inelastic- the quantity changes by less than the price, in terms of percent. Number of substitutes- the closer substitutes available, the more elastic. Level of necessity- the less necessary a good, the more elastic. Percentage of budget- the higher the percentage of the budget, the more elastic. Time- the more time someone has, the more elastic: longer time window means more opportunities to find substitutes, for example. Price and quantity were correlated, but price was not causing quantity change. Ei>1: luxury good- buy more at a faster rate than income is increasing. Estimates of cigarette tax revenues (from all sources) 56% of retail price of cigarettes goes to the government. 42% of retail price of cigarettes goes to the government.

Related Questions

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) The fewer the number substitutes there are for a product.

(a) the less the price elastic the demand for the product is.

(b) the more price elastic the demand for the product is.

(d) the smaller the income elasticity for the product.

2) When people have more time to respond to price changes, demand becomes

(a) more elastic

(b) less elastic

(d) neither more nor less elastic because time has no effect on demand.

3) If the owner of an ice cream store charges a $ 1.20 for an ice cream cone his total revenue is $540 a day. If he lowers the price to $ 1.00 his total revenue is $ 500 a day. The demand for the ice cream is

(a) elastic

(b) inelastic

(d) neither more nor less elastic because time has no effect on demand.

4. The Bill Branch Tool Company wants to increase the quantity of tools it sells by 10%. If the price elasticity of demand is -2.5 the company must

(a) decrease price by 4.0%

(b) increase price by 4.0%

(d) increase price by .025%

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

ECON 22060 Lecture Notes - Lecture 7: Luxury Goods, Inferior Good, Normal Good

Document Summary

Get access

Related Documents

ECON 22060 Lecture Notes - Lecture 7: Seasonal Food, Negative Number, Consumer Spending

ECON 22060 Lecture Notes - Lecture 6: Economic Surplus, Marginal Utility

ECON 103 Lecture Notes - Lecture 14: Inferior Good, Demand Curve, Normal Good

Related Questions