ECON 202 Lecture 40: ECON202Notes

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8 Mar 2017

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Non-rival in consumption (one person"s consumption does not affect another"s consumption of good. Markets provide less than efficient quantity of public good (free-rider problem: Situation in which one consumes good without paying) Price elasticity of demand: measures responsiveness of quantity demanded to change in price. Greater than 1: % change in quantity demanded > % change in price, demand is elastic (responsive to price change) Equal to 1: demand is unit elastic. Less than 1: % change in quantity demanded < % change in price, demand is inelastic (unresponsive to price change) Midpoint method: price elasticity = q + q1. Price of good takes up larger share of consumer"s budget = greater elasticity. The longer a price change remains in effect, the more elastic demand is. Demand is elastic: price/total revenue are inversely related (price incr = total revenue decr) Demand is inelastic: price/total revenue are directly related (price incr = total revenue incr)

Related Questions

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.

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

Question 1

If economic profits are zero

		accounting profits is less than the cost of capital.
		accounting profit is just covering the cost of capital.
		the cost of capital is negative.
		the entrepreneur should go to his/her next best alternative.

3 points

Question 2

Markets provide

information.

prices.

incentives.

all of these choices.

3 points

Question 3

The entrepreneur is always searching for

positive profit.

normal profit.

accounting profit.

economic profit.

3 points

Question 4

Social regulations can create

a more competitive market place.

network externalities.

a lower HHI.

barriers to entry.

3 points

Question 5

According to economic theory, profits are maximized where

total revenue equals total cost.

marginal revenue equals marginal cost.

price and average cost are equal.

where marginal product and average cost are equal.

3 points

Question 6

Brand names help

create commodities.

maintain market power.

create competition.

keep economic profits at zero.

3 points

Question 7

Entry of new firms causes

accounting profits to go to zero.

market share to grown.

economic profits to go to zero.

total revenue to be maximized.

3 points

Question 8

Fixed costs

do not vary with output

vary with output

do not vary with price

vary with price

3 points

Question 9

Variable costs

do not vary with price.

do not vary with output.

vary with price.

vary with output.

3 points

Question 10

Value maximization means

		that managers make decision so as to increase the long-run market value of the financial claims on the firm.
		that a firm should make products that have the highest price.
		that managers make decision so as to increase the short-run market value of the financial claims on the firm.
		all of these choices.

3 points

Question 11

A manager can determine if her product is viewed as a normal good or an inferior good by considering

price elasticity.

cross elasticity.

income elasticity.

advertising elasticity.

3 points

Question 12

If demand is perfectly elastic,

		the smallest increase in price will cause quantity demanded to fall to zero.
		the smallest increase in price will cause demand to fall to zero.
		the smallest increase in price will cause quantity demanded to fall.
		the smallest increase in price will cause demand to fall.

3 points

Question 13

If demand is perfectly elastic, then

demand and price are inversely related.

quantity demanded and price are inversely related.

the demand curve is a vertical line.

the demand curve is a horizontal line.

3 points

Question 14

If price elasticity is 3.25 then

		for every one percent change in price, there will be a 3.25 percent change in quantity demanded.
		for every one percent change in price, there will be a 3.25 percent change in demand.
		for every one percent change in price, there will be a 32.5 percent change in quantity demanded.
		for every one percent change in price, there will be a .0325 percent change in quantity demanded.

3 points

Question 15

If price elasticity is 3.25, then demand is

inelastic.

elastic.

unitary.

negative.

ECON 202 Lecture 40: ECON202Notes

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Related Questions

		positive profit.
		normal profit.
		accounting profit.
		economic profit.

		a more competitive market place.
		network externalities.
		a lower HHI.
		barriers to entry.

		total revenue equals total cost.
		marginal revenue equals marginal cost.
		price and average cost are equal.
		where marginal product and average cost are equal.

		create commodities.
		maintain market power.
		create competition.
		keep economic profits at zero.

		accounting profits to go to zero.
		market share to grown.
		economic profits to go to zero.
		total revenue to be maximized.

		do not vary with output
		vary with output
		do not vary with price
		vary with price

		do not vary with price.
		do not vary with output.
		vary with price.
		vary with output.

		price elasticity.
		cross elasticity.
		income elasticity.
		advertising elasticity.

		demand and price are inversely related.
		quantity demanded and price are inversely related.
		the demand curve is a vertical line.
		the demand curve is a horizontal line.

		information.
		prices.
		incentives.
		all of these choices.

		inelastic.
		elastic.
		unitary.
		negative.