MGEA01H3 Chapter Notes - Chapter 4: Price Elasticity Of Demand, Diet Pepsi, Demand Curve

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aquamarineshark305

20 Feb 2016

School

UTSC

Department

Economics for Management Studies

Course

MGEA01H3

Professor

Michael H O

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MGEA01H3 Full Course Notes

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Elastic when quantity demanded is quite responsive to changes in price. Inelastic when quantity demanded is relatively unresponsive to changes in price. Steeper curve has larger absolute slope (more inelastic) Price elasticity of demand (greek letter n) the measure of responsiveness of the quantity of a product demanded to a change in that product"s price. The more responsive the quantity demanded to a change in price, the greater the elasticity, and the larger is n. N=0 no change in quantity demanded: vertical demand curve. N= a very small change in price leads to an enormous change in quantity demanded: horizontal demand curve. N<1 inelastic demand: when the percentage change in quantity demanded is less than the percentage change in price. N>1 elastic demand: when the percentage change in quantity is greater than the percentage change in price. N=1 unit elastic: when percentage change in quantity demanded is exactly equal to the percentage change in price.

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interval (or arc) elasticity

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price elasticity of demand

elastic demand

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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.

The price elasticity of demand measures the responsiveness of the change in:

a. Quantity demanded to a change in price.

b. Price to a change in quantity demanded.

c. The slope of the demand curve to a change in price.

d. The slope of the demand curve to a change in quantity demanded.