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CAS EC 101 Lecture Notes - Lecture 6: Price Ceiling, Price Floor, Comparative Statics

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School
Boston University
Department
Economics
Course
CAS EC 101
Professor
Neil Watson

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CAS EC 101 Full Course Notes
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Document Summary

Questions for review: what is the difference between change in demand (supply) and change in. 1% change in price, effect the change in the quantity demanded: the stepper , the more inelastic, the atter, the more elastic, calculating elasticity using the midpoint formula, formula, |ed|>1 elastic. For substitutes, cross-price elasticity > 0 (e. g. , an increase in price of beef causes an increase in demand for chicken) For complements, cross-price elasticity < 0 (e. g. , an increase in price of computers causes decrease in demand for software: income elasticity of demand. Income elasticity of demand: recall : an increase in income causes an increase in demand for a normal, hence, for normal goods, income elasticity > 0. For inferior goods, income elasticity < 0: price elasticity of supply measures the response of the quantity supplied a good to changes in the good"s price.

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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 consumers’ 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.

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.

A ban was imposed on the export of oranges to EconoLand. As the Minister of Agriculture you are concerned that this ban could result in a shortage of oranges. Your advisors provide the following recommendations: · Advisor 1: impose a binding price ceiling. · Advisor 2: impose a binding price floor. · Advisor 3: take no action at all.

Determine with regard to demand, supply, price and quantity:

(i) The impact of the ban on the market for oranges in EconoLand.

(ii) The impact on the market for oranges in EconoLand if each recommendation is implemented.

Your answer options for each one of demand, supply, price and quantity are:

  • Decrease toward Equilibrium
  • Increase Equilibrium price
  • Excess Supply
  • Decrease Equilibrium price
  • No Impact
  • Increase Equilibrium quantity
  • Increase toward equilibrium
  • Decrease Equilibrium quantity
  • Change in price uncertain
  • Shift inwards/ to the left
  • Excess Demand
  • Change in quantity uncertain
  • Shift outward/ to the right