ECON 010 Chapter Notes - Chapter 6: Demand Curve

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31 May 2018

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Econ010 Chapter 6

Elasticity: A measure of how much one economics variable responds to changes in

another economic variable

Price elasticity of demand: responsiveness of quantity demanded to a change in

price measured by dividing % change in quantity demanded of product by % change

in price (not same as slope of curve); always negative but compare absolute values

Elastic demand: demand is elastic when % change in quantity demanded>%change

in price; price elasticity>1 in absolute value

Inelastic demand: demand is inelastic when % change in quantity

demanded<%change in price; price elasticity<1 in absolute value

Unit-elastic demand: demand is unit elastic when % change in quantity

demanded=%change in price; price elasticity=1 in absolute value

Perfectly inelastic demand: quantity demanded is completely unresponsive to

price and the price elasticity of demand=0

Perfectly elastic demand: quantity demanded is infinitely responsive to price and

price elasticity of demand=infinity

Total revenue: total amount of funds received by a seller of a good or service (price

per unit*number of units sold)

Cross price elasticity of demand: % change in quantity demanded of one good

divided by % change in price of another good; positive if substitutes, negative if

complements; unrelated goods=0

Income elasticity of demand: measure of responsiveness of quantity demanded to

changes in income, measured by % change in quantity demanded divided by %

change in income

Luxury: quantity demanded is very responsive to changes in income

Necessity: quantity demanded not very responsive to changes in income

Price elasticity of supply: responsiveness of quantity supplied to a change in price,

measured by dividing % change in quantity supplied of product by % change in

product’s price (positive #)

Calculating elasticity

When calculating price elasticity between two pts on a demand curve, we get a

different value for price increases than for price decreases

→

Use midpoint formula

•

฀

(Q2−Q1)

(Q1+Q2)

/(P2−P1)

(P1+P2)

Determinants of Price Elasticity of Demand

Availability of close substitutes

• If product has more substitutes available, it will have more elastic demand

Passage of time

• The more time that passes, the more elastic the demand for a product

becomes

Luxuries vs necessities

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Document Summary

Elasticity: a measure of how much one economics variable responds to changes in another economic variable. Elastic demand: demand is elastic when % change in quantity demanded>%change in price; price elasticity>1 in absolute value. Inelastic demand: demand is inelastic when % change in quantity demanded

Related Questions

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.

coffeehornet269

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.

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.

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ECON 010 Chapter Notes - Chapter 6: Demand Curve

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