ECON 110 Chapter Notes - Chapter 4: Normal Good, Tax Incidence, Negative Number

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Def: a measure of the responsiveness of quantity demanded to a price change. Demand is said to be elastic when quantity demanded is quite responsive to price changes: price change severely effects the market equilibrium. Inelastic when quantity demanded is relatively unresponsive to price changes: price change does not severely affect the market equilibrium. The measurement of an increase can be very subjective unless you know the former quantity demanded an increase of 75000 units may be impressive, but not if the former quantity was 1 million units. The use of average price and quantity in computing elasticity. Averages are used to avoid the ambiguity caused by the fact that when a price or quantity changes, the change is a different percentage of the original price. Because demand curves have negative slopes, an increase is associated with a decrease in quantity demanded, and vice versa.

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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

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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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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.

Two to three pages should be sufficient for each question

2. Assume that the demand for plastic surgery is price inelastic. Are the following statements true or false? Explain your answer for full credit.

o When the price of plastic surgery increases, the number of operations decreases.

o The percentage change in the price of plastic surgery is less than the percentage change in quantity demanded.

o Changes in the price of plastic surgery do not affect the number of operations.

o Quantity demanded is quite responsive to changes in price.

o The marginal revenue of another operation is negative.

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ECON 110 Chapter Notes - Chapter 4: Normal Good, Tax Incidence, Negative Number

ECON 110 Full Course Notes

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