Economics 2150A/B Chapter Notes - Chapter 4: Normal Good, Inferior Good, Plus And Minus Signs

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2 Feb 2013

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ECON 2150A/B Full Course Notes

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Price elasticity of demand : units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Price elasticity of demand = percentage change in quantity demanded / percentage change in price: price elasticity of demand = difference between the quantity demanded / average quantity demanded difference between the prices/ average price. Use average price and quantity due to the reason that it gives the most precise measurement of elasticity (midpoint between the original and new) Percentage and proportions: elacticity is the ratio of 2 percentagechanges (same answer with percentage or not) If the quantity demanded is constant regardless of price then the price elasticity of demand is 0 (perfect inelastic demand) ex. Insulin , diabetics needs them so the price change does not affect their demand. Elasticity and slop are not the same, however they are related.

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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.

The price elasticity of demand measures how much in percentage terms:

1. demand falls (shifts to the left) when price rises.

2. demand rises (shifts to the right) when price falls.

3. quantity demanded falls when price rises.

4. quantity demanded rises when price rises.

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Economics 2150A/B Chapter Notes - Chapter 4: Normal Good, Inferior Good, Plus And Minus Signs

ECON 2150A/B Full Course Notes

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