ECON 2020 Study Guide - Midterm Guide: Rede Ferroviária Nacional, Market Distortion, Pink Triangle

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1 Mar 2018

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Availability of close substitutes: goods with close substitutes = more elastic demand; goods with no close substitutes = more inelastic demand: ex: for consumers, diet coke has many close substitutes. Therefore, demand would be more elastic: ex: if price of eggs goes up, demand is inelastic. (eggs cannot be replaced in a recipe) Necessities v. luxuries: necessities = inelastic demand; luxuries = elastic. Demand: ex: if price of yacht (luxury good) were to double, qd would decrease. Definition of the market: narrowly defined markets (ex: diet coke) tend to have a more elastic demand than broadly defined markets (ex: soft drinks in general: narrowly defined markets have more alternatives. Time horizon: demand is more elastic over longer time horizons. In the long run, demand is more elastic. In the short run, demand is less elastic: ex: if the price of gas goes up in the short run (a couple of days, a week, etc.

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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.

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.

coffeehornet269

From the scenario for Katrinaâs Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ÎTR = %ÎQ + %ÎP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Î in TR if ED is -.85 and the %ÎP is 10%?

lilaccattle807

ECON 2020 Study Guide - Midterm Guide: Rede Ferroviária Nacional, Market Distortion, Pink Triangle

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