ECON 1000 Chapter 5: MICRO ECONOMICS CHAPTER FIVE

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pinkjackal290

6 Sep 2018

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Elasticity: the measure of the responsiveness of the quantity demanded or quantity supplied to one of its determinants. The price elasticity of demand and its determinants. Price elasticity of demand= percentage change in quantity demanded/percentage change in price. The midpoint method: a better way to calculate percentage change. Total revenue (in a market): the amount paid by buyers and received by sellers of a good, computed as the price of a good times the quantity sold. If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains constant when the price changes. Income elasticity of demand: a measure of how much the quantity demanded of a good responds to change in consumers income, computed as the percentage change in quantity demanded divided by the percentage change in income. Perfectly inelastic: no matter what the price is the same quantity will be bought (closest market to this is medication one needs in order to survive)

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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.

Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand:

• Number of substitutes

• Whether the good is a necessity or a luxury

• Percentage of one's budget spent on the good

• Time horizon being considered

A. A good with many close substitutes is likely to have relatively ___________ demand since consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

B. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

1. Chemotherapy for cancer patients

2. Yacht

The price elasticity of demand for good also depends on how you define the good.

C. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

1. Beverages

2. Merlot

3. Wine

D. The price elasticity of demand is also affected by the given time horizon. Other things being equal, the demand for natural gas will tend to be _________ elastic in the short run than in the long run.

browngoat320

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.

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ECON 1000 Chapter 5: MICRO ECONOMICS CHAPTER FIVE

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