CAS EC 101 Chapter Notes - Chapter 5: Midpoint Method, Demand Curve

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14 Apr 2014

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The elasticity of demand: the price of elasticity of demand and its determinants. The price elasticity of demand measures how much the quantity responses to a change in price. Demand for good is elastic if quantity demanded responds substantially to changes in price: availability of close substitutes. Goods with more close substitutes more elastic b/c it is easier for customers to switch goods: necessities v. luxuries. Necessities have inelastic demands, luxuries have elastic: definition of the market. Elasticity of demand in any market depends on how we draw boundaries of the market. Narrowly defined markets more elastic demand b/c easier to find substitutes: time horizon. If demand is inelastic, increase in price = increase in revenue , opposite result if demand is elastic: other demand elasticities, the income elasticity of demand. Measures how the quantity demanded charges as consumer income changes. Percentage change in quantity demanded/percent change in price: the cross-price elasticity of demand.

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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.

Explain why the demand for the good or service provided by a firm is elastic or inelastic. How does the elastic or inelastic demand influence pricing decisions by the firm to maximize profit? What are the impacts of elastic demand and inelastic demand on total revenue?

Provide examples of how the availability of close substitutes affects the price elasticity of demand for a good or service.

Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

salmonlouse248

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

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CAS EC 101 Chapter Notes - Chapter 5: Midpoint Method, Demand Curve

CAS EC 101 Full Course Notes

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