ECON 1900 Study Guide - Inferior Good, Normal Good, Demand Curve

68 views6 pages

amaranthmuskrat712

21 Feb 2013

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Responsiveness of quantity demanded to a change in price. Since the price elasticity of demand is always negative we ignore the negative sign. If ed = 2, then the percent change in quantity is twice the percent change in price. (for example: 1% increase in price leads to a 2% decrease in quantity. ) Elasticity of demand varies along a straight line demand curve. Relationship between total expenditure (total revenue) and price elasticity of demand. Ded >1quantitypriceed <1ed = 102484108626quantity10price02420161210864824trquantitytotal revenue and the price elasticity of demand: If at the current price, demand is elastic then an increase in price will reduce total revenue. Tr = p q. If at the current price, demand is inelastic then an increase in price will increase total revenue. If at the current price, demand is unitary elastic then an increase in price will not change total revenue. Pdemand is perfectly elasticdqpqddemand is unitary elasticpdemand is perfectly inelasticdqprice elasticity of supply.

Related Questions

1. In each case below, what is the value of the price elasticity of demand? Is demand perfectly inelastic, inelastic, unit elastic, elastic or perfectly elastic?

a. Price falls by 10%, quantity demanded rises by 8%

b. Price rises by 3%, quantity demanded falls by 3%

c. Price rises by 1%, quantity demanded falls by 5%

d. Price rises by 5%, quantity demanded collapses to zero

e. Price falls by 2%, quantity demanded does not change

taupemule214

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. If a 3 percent increase in price leads to a 5 percent increase in quantity supplied, then

a. Supply is unit elastic

b. Demand is inelastic.

c. Demand is elastic.

d. Supply is elastic.

e. Supply is inelastic.

2. Moving along a demand curve, the quantity demanded decreases 8 percent when price increases 10 percent.

The price elasticity of demand is calculated to be ________.

Given the price elasticity of demand calculated in part a, demand is ________ (elastic, inelastic or unitary elastic) along this portion of the demand curve.

3. Fill in the blanks:

When demand is elastic, the _______ effect dominates the _______ effect.

When demand is inelastic, the _______ effect dominates the _______ effect.

4. Use the following coordinates to answer the following questions.

(2400, $0), (1800, $3), (1000, $7), and (0, $12)

a. Find the arc price elasticity of demand over the price range from $3 to $7. Interpret the value of price elasticity.

ECON 1900 Study Guide - Inferior Good, Normal Good, Demand Curve

Document Summary

Get access

Related Documents

ECON 1900 : Burden on tax And Consumer theory question Answer.doc

ECON 1900 Study Guide - Demand Curve

ECON 1900 Study Guide - Economic Equilibrium, Inverse Relation, Ceteris Paribus

Related Questions