ECON 1B03 Study Guide - Final Guide: Perfect Competition, Monopoly Price, Price Discrimination

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. According to the law of demand, an increase in the price of a good causes Select one:

a. a downward movement along the demand curve for that good.

b. a rightward shift of the demand curve for that good.

c. an upward movement along the demand curve for that good.

d. a leftward shift of the demand curve for that good.

2.The relative price of a textbook is

Select one:

a. the amount it cost to make the textbook.

b. the money price of the textbook divided by the money price of some other good.

c. what the author earned for writing the textbook.

d. the price of the textbook compared with what students think it should cost.

3.Which of the following best represents the law of demand?

Select one:

a. As the price of good increases, the quantity demanded of that good decreases.

b. As the demand for a good increase, the price of that good increases.

c. As the price of a good decrease, the demand curve for that good shifts to the right.

d. As the price of a good decrease, the demand for the good increases.

4. The absolute price of a good is its

Select one:

a. subjective price.

b. money price.

c. relative price.

d. projected price.

5. The fact that when the price of a good goes up, people buy less of it is known as the

Select one:

a. law of demand.

b. concept of market equilibrium.

c. need for inferior goods.

d. law of supply.

6.The price of a commodity in terms of another commodity is

Select one:

a. the law of demand.

b. the money price.

c. a substitute.

d. the relative price.

7.Other things being equal, an increase in the price of a good leads to an increase in the amount produced. This is known as

Select one:

a. the law of supply.

b. the law of demand.

c. ceteris paribus.

d. equilibrium.

8.he direct relationship between changes in price and changes in quantity supplied is

Select one:

a. shown by a shift in the supply curve.

b. the law of relative production.

c. the law of supply.

d. a change in supply.

9. The law of supply states that other things being equal,

Select one:

a. supply creates its demand.

b. supply will increase if productivity increases.

c. supply will increase to meet demand if demand increases.

d. as price increases, quantity supplied increases.

10. a price increase will lead to an increase in quantity supplied. This statement is

Select one:

a. a normative statement.

b. untrue always.

c. the law of supply.

d. the law of demand.

11.All of the following will cause a shift in the supply of jeans EXCEPT

Select one:

a. an increase in the cost of producing jeans.

b. a per-unit government subsidy on the production of jeans.

c. a decrease in the number of jean manufacturers.

d. a decrease in the prices of jeans.

12.An increase in the price of steel to producers of refrigerators will cause

Select one:

a. the demand for refrigerators to decrease.

b. the supply curve for refrigerators to shift left.

c. the quantity demanded to feel to increase.

d. the quantity supplied of refrigerators to increase.

Think of another good that you have purchased recently (or you could continue with the good you selected in TDA I). Be specific (e.g. is it breakfast cereal in general or Cheerios cereal specifically). If the price of this item increases, how would this affect the quantity of the good that you consume? Is the Demand for this good Price elastic or Price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product. Say price is on the rise for this product and you are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this product? In other words, how does an increase in price for this good affect your Total Revenue? Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product