ECO-4 Lecture Notes - Lecture 17: Demand Curve, Budget Constraint, Economic Surplus

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7 Aug 2020

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Tp= (p)(q: tr and ed are related. If tr changes in the opposite direction from price, demand is elastic. If tr changes in the same direction from price, demand is inelastic. If tr does not change when price change, demand is unit elastic. Determinants of ed: substitutability (more options you have for goods, more elastic the goods will become, proportion of income, luxuries versus necessities, time (ex. If gas is high, over time youll find a new alternative such as a more fuel effectient car so the elasticity will go down) Efficiently functioning markets: demand curve must reflect the consumers full willingness to pay, supply curve must reflect all the costs of production. Consumer surplus: difference between what a customer is willing to pay for a good and what he actually pays, extra benefit from paying less than the max. Externalities: a cost or benefit accruing to a third party external to the transaction, positive externalities.

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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. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue but an increase in quantity demanded.

d.no change in total revenue but a decrease in quantity demanded.

2. For which of the following types of goods would the income elasticity of demand be positive and relatively large?

a. all inferior goods

b. all normal goods

c. goods for which there are many complements

d. luxuries

3. Which of the following should be held constant when calculating the income elasticity of demand?

a. the quantity of the good demanded

b. the price of the good

c. income

d. All of the above should be held constant.

4. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these two goods to be

a. positive.

b. negative.

c. either positive or negative. It depends on whether A and B are normal goods or inferior goods.

d. either positive or negative. It depends on whether the current price level is on the elastic or inelastic portion of the demand curve.

5. As the price elasticity of supply increases, the supply curve

a. becomes flatter

b. becomes steeper

c. becomes downward sloping.

d. shifts to the right.

brownsea-lion330

A. A competitive firm

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

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

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

C. Along a downward-sloping monopoly demand curve,

marginal revenue is greater than price.
the elasticity of demand is constant.
marginal revenue decreases when the price decreases.
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

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

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

the marginal revenue curve.
perfectly inelastic.
always equal to marginal cost.
the same as the market demand curve

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

monopolistic
oligopolistic
monopolistically competitive
perfectly competitive

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

total revenue will fall if the price increases.
total revenue will be unchanged if the price increases.
total revenue will rise if the price increases.
the total supply will increase by an equal amount if demand increases.
the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

monopoly.
perfect competition.
theories of consumer behavior.
imperfect competition.
the extreme cases on the market structure continuum

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

perfect competition
monopolistic competition
oligopoly
monopoly

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

economic profits are zero.
TR > TC.
TR < TC.
P = AVC.
normal profits are zero.

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ECO-4 Lecture Notes - Lecture 17: Demand Curve, Budget Constraint, Economic Surplus

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