ECON 200 Lecture Notes - Lecture 10: Prescription Drug, Ceteris Paribus

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ivorysea-lion839

30 Aug 2018

School

University of Arizona

Department

Economics

Course

ECON 200

Professor

ALL

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ECON 200 Full Course Notes

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Elasticity is how responsive consumers are to prices. Percentage of budget: small % of budget is inelastic and large % of budget is elastic. Closeness of substitutes: few close substitutes - inelastic and many close substitutes - elastic. Market definition: broad - inelastic narrow - elastic. Durability of a good - non durable (food (things that expire)) - inelastic durable - elastic. Unit elastic - quantity demanded reacts the same as the price change. Responsiveness of people to change of price in good. Broad market definition - less substitutes - inelastic. Unit elastic - 1 percent increase in price causes 1 percent decrease in demand. Perfectly inelastic: responsiveness doesn"t change at all (medical items (insulin, prescription drug))

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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. Calculate the price elasticity for the following good. State whether the price elasticity of demand is elastic, unit elastic, or inelastic. Will revenue rise, decline, or stay the same with the given change in price? Be sure to show your work. The price of water beds rises from $500 to $600. Quantity demanded falls from 100,000 to 80,000.

2. Calculate the income elasticity of demand for the following good. State whether it is a luxury, a necessity, or an inferior good. Explain. Show your work. As income decreases from $20,000 to $18,000 per year, demand for summer cottages in Vermont decreases from 80 to 75.

3. When the price of ketchup rises by 15 percent, the demand for hot dogs falls by 10 percent. Calculate the cross-price elasticity of demand. Are the goods complements or substitutes?

4. Use the accounts listed below to answer the following questions about the profit of a retail business.

Total Revenue	$80,000
Hired Labor	$30,000
Inventory purchased for resale	$20,000
Interest that the owner could have earned on an alternative investment	$2,000
Income that the owner could have earned by renting the firm

blackbear798

3. When the price of ketchup rises by 15 percent, the demand for hot dogs falls by 10 percent. Calculate the cross-price elasticity of demand. Are the goods complements or substitutes?

4. Use the accounts listed below to answer the following questions about the profit of a retail business.

Total Revenue	$80,000
Hired Labor	$30,000
Inventory purchased for resale	$20,000
Interest that the owner could have earned on an alternative investment	$2,000
Income that the owner could have earned by renting the firm

beigereindeer337

ECON 200 Lecture Notes - Lecture 10: Prescription Drug, Ceteris Paribus

ECON 200 Full Course Notes

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