MGEB02H3 Chapter Notes - Chapter 2: Lifesaving, Arc Elasticity, Margarine

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blushhippopotamus560

24 Jun 2018

School

UTSC

Department

Economics for Management Studies

Course

MGEB02H3

Professor

A.Mazaheri

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The price elasticity is usually a negative number since increase in price = decrease in

demand.

In general, the price elasticity of demand for a good depends on the availability

of other goods that can be substituted for it. When there are close substitutes, a

price increase will cause the consumer to buy less of the good and more of the

substitute. Demand will then be highly price elastic. When there are no substitutes,

demand will tend to be price inelastic.

The price elasticity of demand depends

not only on the slope of the demand

curve but also on the price and quantity.

The elasticity, therefore, varies along

the curve as price and quantity change.

Slope is constant for this linear demand

curve.

Near the top, because price is high and

quantity is small, the elasticity is large in

magnitude. The elasticity becomes

smaller as we move down the curve.

1) Infinitely elastic demand

The principle that consumers will buy as much as they can (or as much quantity

possible) for a specific price (P*) and even a small increase will cause the quantity to

fall to zero and for any decrease quantity will increase without limit .

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Document Summary

The price elasticity is usually a negative number since increase in price = decrease in demand. In general, the price elasticity of demand for a good depends on the availability of other goods that can be substituted for it. When there are close substitutes, a price increase will cause the consumer to buy less of the good and more of the substitute. When there are no substitutes, demand will tend to be price inelastic. The price elasticity of demand depends not only on the slope of the demand curve but also on the price and quantity. The elasticity, therefore, varies along the curve as price and quantity change. Slope is constant for this linear demand curve. Near the top, because price is high and quantity is small, the elasticity is large in magnitude. The elasticity becomes smaller as we move down the curve.

Related Questions

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.

coffeeelephant81

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.

47. When a public transit system (such as a subway or bus line)raises its fares, it may experience an increase in total revenue.This suggests that demand is:
A) unstable.
B) price inelastic.
C) price elastic.
D) unit price elastic.
45. If the quantity demanded of agricultural output is veryunresponsive to a fall in price, the demand for agricultural outputis:
A) price elastic.
B) price inelastic.
C) positively sloped.
D) horizontal.
48. A constant price elasticity of demand curve is one whose:
A) slope is the same at every point on the curve.
B) price elasticity of demand is the same at every point on thecurve.
C) quantity is the same at every point on the curve.
D) price elasticity of demand and slope are the same at every pointon the curve.

49. Whenever supply increases, the resulting market price willalways be lower except:
A) when demand is perfectly price elastic (when the demand curve ishorizontal).
B) when demand is completely price inelastic (when the demand curveis vertical).
C) when supply is perfectly price inelastic (when the supply curveis vertical).
D) in the case of demand having unit price elasticitythroughout.

50. A demand curve that is perfectly inelastic:
A) will be vertical.
B) will be horizontal.
C) will be upward sloping.
D) has an elasticity equal to 1 everywhere on the curve.

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MGEB02H3 Chapter Notes - Chapter 2: Lifesaving, Arc Elasticity, Margarine

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