ECON 1B03 Lecture Notes - Lecture 4: Normal Good, Root Mean Square, Inferior Good

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ECON 1B03 Full Course Notes

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Elasticity: measures how responsive qd or qs is to changes to p and other determinants. Total revenue = price x quantity selling at that price. Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Computed as the percentage change in the qd divided by the percentage change in p. Ep = % change in qd / % change in p. The number we get is our coef cient of elasticity, the size of this number will tell us how elastic the good is in price. The larger the coef cient the more responsive a good with be to a change. Inelastic demand: a change in p leads to a proportionately smaller change in qd. Demand is not very responsive to a price change. Percentage change in p > percentage change in qd (ep < 1)

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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

A Steel Supply and Demand for the USA are given by Demand: P = 1200 - 100 (QD) and supply: P = 100 (QS) where QD = quantity demanded and QS = quantity supplied

Compute the price elasticity of demand when the price is $800.

What can you say about the demand?

Compute the price elasticity of demand between $200 and $900.

Is the demand elastic or inelastic?

raspberryant872

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.

ECON 1B03 Lecture Notes - Lecture 4: Normal Good, Root Mean Square, Inferior Good

ECON 1B03 Full Course Notes

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