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

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School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes

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ECON 1B03 Full Course Notes
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ECON 1B03 Full Course Notes
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Document Summary

Elasticity: is a measure of how quantity demanded or supplied responds when one of their determinants changes. This measures how qd responds when the selling price of that good changes. This measures how qd responds when the income of consumers of that good changes. If income elasticity is positive, the good is a normal good. If income elasticity is positive, the good is normal. If income elasticity is negative, the good is inferior. This measures how the qd of one good responds when the selling price of the good changes. If cross-price elasticity is positive, the goods are substitutes. If the cross-price elasticity is negative, the goods are compliments. This measures how qs responds when the selling price of that good changes. The law of supply means that the price of elasticity of supply will always be positive. When you divide the percentage change in q by a percentage change in determinant, the number is the coefficient of elasticity.

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Related Questions

(a) Explain why the cross elasticity of demand for substitute goods is positive and the cross elasticity of demand for complements is negative.

(b) Explain why the price elasticity of demand changes along a linear demand curve.

(c)

Income Px Py Quantity of good x Quantity of good y
$30,000 $6 $3 2  20 
$50,000 $6 $4  5 10

(i) Using the information in the table, calculate the income elasticity of demand for good X and characterize the good. Use the midpoint formula.

(ii) Can you calculate the income elasticity of demand for good Y? If you can, show your calculation and characterize the good. If you cannot, explain why.

FILL IN THE BLANKS

Demand for this good is (enter inelastic, elastic or unitary elastic) with respect to price.

This is a (enter normal or inferior) good as income elasticity is (enter less than, greater than or equal) zero, and it is a (enter necessity or luxury) good as income elasticity is (enter less than, greater than or equal) one.

Widgets and gadgets are (enter complements or substitutes), because cross-price elasticity is (enter positive or negative). Widgets and gadgets (enter are or are not) good substitutes because cross-price elasticity is (enter less than, greater than or equal) (enter the numerical value).

When the price of good A rises from $180 to $220, the quantity of good A demanded decreases from 250 to 150 units a day, and the quantity of good C demanded increases from 75 to 125 units a day.

From this information, we can determine that _______.

A. the cross elasticity of demand is positive, so the two goods are substitutes

B. the goods are complements because as the price of good A changes so does the quantity demanded of good C

C. good C is a normal good because as the price of good A rises, people switch to good C

D. the cross elasticity of demand is less than 1, so the two goods are substitutes