ECON 101 Lecture Notes - Lecture 7: Price Ceiling, Price Floor, Market Clearing

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25 Aug 2016

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Two extreme cases of price elasticity of supply: perfectly inelastic supply. Changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line: perfectly elastic supply. Even a tiny increase or reduction in the price will lead to very large changes in quantity supplied. A perfectly elastic supply curve is a horizontal line. What factors determine the price elasticity of supply: availability of inputs. The price elasticity of supply tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost. Tends to be small when inputs are difficult to obtain: time. The price elasticity of supply tends to grow larger as producers have more time to respond to a price change. Long-run price elasticity of supply is often higher than the short-run elasticity.

Related Questions

Match the following terms with their proper definitions.

Potential Matches:

1 : measures the responsiveness of the quantity supplied of a good to changes in the price of that good

2 : a formula that measures the responsiveness along a specific section (arc) of a supply or demand curve and measures the "average" price elasticity between two points on the curve.

3 : measures the responsiveness of the quantity supplied of a good to changes in the price of the related good

Answer

: Own-Price Elasticity of Supply

: Cross-Price Elasticity of Supply

: Arc Elasticity

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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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.

ECON 101 Lecture Notes - Lecture 7: Price Ceiling, Price Floor, Market Clearing

ECON 101 Full Course Notes

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