ECO100Y5 Chapter Notes - Chapter 4: Demand Curve, Price Drop, Negative Number

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Demand is elastic when qd is responsive to change in price. Demand is inelastic when qd is unresponsive to change in price. It is usually better to know percentage change in prices of various products rather than fixed amount. Knowing the initial demand is also useful. Price elasticity of demand ( ); measure of responsiveness of qd to change in commodity"s price. = % change in qd new old/average (new + old/2)/new old/average (new + old/2) This measure is called price elasticity of demand / demand elasticity. Increase in price associated with decrease in quantity. Elasticity is 0 when price leads to no change in qd (vertical demand curve: means consumers do not alter consumption when price changes. Availability of substitutes and time period under consideration. Total expenditure depends on price elasticity of demand. Change in total expenditure depends on relative changes in price and quantity.

Related Questions

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.

Over the last year your boss has noticed that it would be useful for your firm to understand how consumers behave when variables in the market change and how these changes affect the total revenue for your product. You have been asked to do an analysis for your product, Good A, by addressing the following questions and reporting the results to your boss in a formal paper.

Questions:

Define the price elasticity of demand? What information does it provide? How is it calculated?
Define the income elasticity of demand? What information does it provide? How is it calculated?
Define the cross-price elasticity of demand? What information does it provide? How is it calculated?
What is total revenue? How is it calculated?
Define elastic, inelastic, and unitary elasticity means. How are these related to total revenue? Explain your answers.
With respect to the price elasticity of demand, construct a graph using the data in Figure1. Illustrate the ranges on the demand curve that indicate elastic, inelastic, and unitary elasticity. Explain your answers. Enter non-numerical responses in the same worksheet using textboxes.
Calculate the total revenue for each level of demand and post into the table, Figure 1. (Copy and paste this table into the Microsoft Word document that will form part of your submission.)
Using the midpoints formula presented in the textbook, calculate the price elasticity coefficient for each price level, starting with the coefficient for the $4 to $6 level. For each coefficient, indicate each type of elasticity: elastic demand, inelastic demand, or unitary demand. Post your answers into the table, Figure 1.
Assume that the income of consumers changes by 10%, and as a result the quantity demanded for Good A changes by 8%. What is the income elasticity of demand for Good A? What does this mean for your company?
Assume that the price of competing Good B decreases by 5% and as a result, the quantity demand for Good A decreases by 8%. What is the cross-price elasticity for your product? What type of goods are Good A and Good B?

Figure 1: The Demand Schedule for Barbeque Dinners

Price	Quantity Demanded	Total Revenue	Elasticity Coefficient	Elastic or Inelastic
$4	100	__________	XXXX	XXXX
6	80	__________	__________	__________
8	60	__________	__________	__________
10	40	__________	__________	__________
12	20	__________	__________	__________
14	1	__________	__________	__________

ECO100Y5 Chapter Notes - Chapter 4: Demand Curve, Price Drop, Negative Number

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