ECON 240 Study Guide - Midterm Guide: Substitute Good, Complementary Good, Conditional Probability

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26 Mar 2019

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Document Summary

Derived demand- the demand for factors of production is derived from the demand for the final goods and services that they are used to produce. Human capital- labor that has been enriched by capital investment in training, health, experience, etc. Normal goods- price elasticity of demand is greater than the income-elasticity of demand; price is the most important determinant of the quantity demanded. Inferior goods- income elasticity that is greater than their price elasticity; only demand at low incomes. Superior goods- income elasticity that is greater than their price elasticity; only demand at high incomes. Income- the income of the consumer is positively related to the quantity demanded for all goods and services. Age- as incidents of poor health increase, the demand for health care also increases, but there is not a strong correlation to age-in-years. Education- people who are more highly educated demand more health but less health care because they use health care services more efficiently.

Related Questions

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 the supply curve is relatively flat, then the price elasticity of supply will be:

a. relatively large. b. relatively low. c. negative. d. decreasing at an increasing rate.

2)Last semester there were 5000 parking spaces available on campus. The price of a parking permit was $80 per semester, and the quantity demanded equaled the quantity supplied at this price. Suppose the number of parking spaces increases by 10% and the elasticity of demand for parking is 0.5. Parking Services should ________ the price of a permit by ________ to guarantee that quantity demanded will equal quantity supplied.

a. decrease; 10% b. decrease; 20% c. decrease; 5% d. increase; 10%

3)Two goods are complements if the: Select one:

a. price elasticity of each is greater than one. b. income elasticity of each is negative. c. cross-price elasticity is negative. d. cross-price elasticity is positive.

4)Suppose the price elasticity of supply for rocking chairs is 1.2 and the price increases by 20%. The quantity supplied will increase by ________ %. Select one:

a. 20 b. 24 c. 18 d. 12

5)The price elasticity of demand for gasoline is 0.5 and the price elasticity of supply for gasoline is 1.1. If demand rises by 25%, the price of gasoline will: Select one:

a. rise by 15.6%. b. fall by 15.6%. c. rise by 6.4%. d. fall by 6.4%.

6)The price elasticity of demand for wheat bread is 2.1 and the price elasticity of supply for wheat bread is 1.6. If demand falls by 20%, the price of wheat bread will: Select one:

a. rise by 5.41%. b. fall by 5.41%. c. rise by 18.5%. d. fall by 18.5%.

7)Good X and good Y are substitutes if the: Select one:

a. income elasticity of each is negative. b. income elasticity of each is positive. c. cross-price elasticity is negative. d. cross-price elasticity is positive.