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ECON-221 Lecture Notes - Lecture 8: Demand Curve, Price Elasticity Of Demand, Profit Maximization

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School
Diablo Valley College
Department
Economics
Course
ECON-221
Professor
yoon

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Document Summary

Econ-221: determinants of price elasticity, initial price of a good. Price elasticity of demand changes as we move along a demand curve: availability of substitutes. The more substitutes a good has the more elastic the demand for it is likely to be: the proportion of consumer"s incomes spent on the goods. Goods that take a large proportion of consumer"s income e. g. cars tend to have move elastic demand than goods like salt which only take a small proportion of consumer"s income: time. Total sales revenue therefore remain unchanged. : price cross elasticity of demand. This measure the relative responsiveness of quantity demanded of a given commodity to changes in the price of related commodity. In other words, it is the proportional change of good. X divided by the proportional change in the price of good y. This will be positive if the related good is a substitute good and negative if the related goods a complement.

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Related Questions

Consider some determinants of the price elasticity of demand:

  • The availability of close substitutes
  • Whether the good is a necessity or a luxury
  • How broadly you define the market?
  • The time horizon being considered
 

A good without any close substitutes is likely to have relatively ___________(inelastic/elastic) demand since consumers cannot easily switch to a substitute good if the price of the good rises.

A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

A. Diamond necklace

B. A heart value for heart attack victims

The price elasticity of demand for good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories Most Elastic In Between Least Elastic
Food      
Red Bell Peppers      
Vegetables      
 

The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the demand for gasoline is__________ (less, more, no more, nor less) elastic in the short run than in the long run.

 

1. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

  • The availability of close substitutes
  • Whether the good is a necessity or a luxury
  • How broadly you define the market
  • The time horizon being considered

A good without any close substitutes is likely to have relatively inelastic or elastic demand since consumers cannot easily switch to a substitute good if the price of the good rises?


2. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

a. Diamond necklace

b. Amputation procedures for diabetes sufferers

 

3. The price elasticity of demand for good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories:

Most Elastic

In Between

Least Elastic
Food        
Red bell peppers        
Vegetables        

 

4. The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the gasoline demand is _______ elastic in the short run than in the long run.

a. less

b. more

c. no more, no less

 

 

If the percentage change in the quantity demanded of a good is less than the percentage change in price, the price elasticity of demand is:

A) Elastic

B) Inelastic

C) Perfectly inelastic

D) Unitary elastic