ECON 1B03 Chapter Notes - Chapter 4: Inferior Good, Normal Good, Demand Curve

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ECON 1B03 Full Course Notes

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If given % changes in income and corresponding changes in qd the formula is: et = % change in qd / % change in n. If we are given 2 levels of income and their corresponding qd, we have to calculate the % changes in qd and income: plus or minus sign matters. If en > 0: the good is a normal good, as n increases, qd increases. If en < 0: the good is an inferior good, as n decreases, qd increases. If en is between -1 and 1, the good is income inelastic: good consumers regard as necessities tend to be income inelastic. If elasti(cid:272)it(cid:455) is > 0, a(cid:374) i(cid:374)(cid:272)(cid:396)ease i(cid:374) p of (cid:862)(cid:271)(cid:863) will lead to a(cid:374) i(cid:374)(cid:272)(cid:396)ease i(cid:374) qd of (cid:862)a(cid:863: the goods are substitutes. If elasti(cid:272)it(cid:455) is < 0, a(cid:374) i(cid:374)(cid:272)(cid:396)ease i(cid:374) p of (cid:862)(cid:271)(cid:863) will lead to a de(cid:272)(cid:396)ease i(cid:374) qd of (cid:862)a(cid:863: the goods 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.

2. Income?Qd of Hamburger??Qd of Steak

Per month? per month?per month

Month 1?$750?8 lbs.?2 lbs.

Month 2?$950? 5 lbs.?4 lbs.

a. What is the income elasticity of demand for hamburgers?

b. What is the income elasticity of demand for steak?

c. From our study of demand in an earlier chapter, we know ___________is a normal good, whereas _______________is an inferior good.

3. Suppose the price of Butter Pecan Ice Cream has recently risen by 10% due to an increase in the cost of pecans used to make the ice cream. As a result, fewer Butter Pecan ice cream cones are being sold in the ice cream store where you work. You do some checking and find that Raspberry Chip ice cream cone sales are up 4%. What is the cross-price elasticity of Butter Pecan and Raspberry Chip ice cream cones? Are these two goods complements or substitutes?

12. If the price rises, the quantity supplied will be greater the

a. Longer the time that elapses.

b. More income elasticity is good.

c. Higher the price elasticity of demand for the good.

d. All of the above.

13. If the price elasticity of demand is -.5 and quantity demanded increases by 5%, the price must have

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

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ECON 1B03 Chapter Notes - Chapter 4: Inferior Good, Normal Good, Demand Curve

ECON 1B03 Full Course Notes

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