ECN 104 Chapter Notes - Chapter 5: Normal Good, Midpoint Method, Demand Curve

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22 Oct 2012

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Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. The price elasticity of demand and its determinants. Percentage change in quantity demand / percent change in price: a larger price elasticity implies greater responsiveness of quantity demanded to price. Calculating percentage of change: (end start value / start value) x 100% Midpoint method: (end value start value / midpoint) x 100% or, = (q2 q1)/[(q2 + q1)/2] / (p2 p1)/[(p2 + p1)/2] The determinants of price elasticity: a summary: price elasticity of demand depends on: The extent to which close substitute are available. The time horizon elasticity is higher in the long run than short run. Demand is elastic when elasticity is greater than 1. If the elasticity is exactly 1 (quantity moves the same amount proportionately as price), demand is said to have unit elasticity. Price elasticity of demand is closely related to slope of the demand curve.

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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.

27. Which of the following statements is correct? a. The greater the price elasticity of demand, the more likely the product is a necessity. b. The greater the price elasticity of demand, the smaller the responsiveness of quanti demanded to price. The greater the price elasticity of demand, the greater the percentage change in price over the percentage change in quantity demanded. d. The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to price.

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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ECN 104 Chapter Notes - Chapter 5: Normal Good, Midpoint Method, Demand Curve

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