ECO 201 Study Guide - Midterm Guide: Economic Surplus, Inferior Good, Sales Tax

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13 Mar 2016

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Price elasticity of demand is how the percentage change in prices causes a percentage change in demand. Price elasticity of demand formula: ep= q/ p( p /q) Cross price elasticity of demand: is the change in demand of good a due to the price change of good b. Income elasticity of demand: the percentage change in demand due to the percentage change in income. If the elasticity is positive it is a normal good, if it is negative it is an inferior good. Tax burden: if it is more elastic the burden falls on consumers; if it is inelastic the burden falls on the producers. It is false that because an economic is self interested it means he/she is also selfish. Consumer surplus: difference between the value of the good and the price the consumer pays. Producer surplus: the difference between the cost of production and the price they sell the good at.

Related Questions

5. The demand curve for a product is given by Qdx = 1,000 - 2Px + .02Pz where Pz = $400. (Hint: If you're not comfortable with the calculus alternatives, compute Q at the given prices, then again with a 1% increase in price. Then figure percentage change in Q over the percentage change in P, %Q/%P).

a. What is the own-price elasticity of demand when Px = $154? Is the demand elastic or inelastic? What would happen to the firm's revenue if it decided to charge a price below $154?

b. What is the own-price elasticity of demand when Px = $354? Is the demand elastic or inelastic? What would happen to the firm's revenue if it decided to charge a price below $354?

c. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are good X and good Z substitutes are complements?

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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.

If a good is inferior in an economic sense,

a. it is demand price elastic.

b. it is demand price inelastic.

c. the income elasticity of demand is negative.

d. it is a low-quality good.

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ECO 201 Study Guide - Midterm Guide: Economic Surplus, Inferior Good, Sales Tax

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