ECON 20A Lecture Notes - Lecture 5: Breakfast Cereal, Midpoint Method, Sunscreen
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Over the last year your boss has noticed that it would be useful for your firm to understand how consumers behave when variables in the market change and how these changes affect the total revenue for your product. You have been asked to do an analysis for your product, Good A, by addressing the following questions and reporting the results to your boss in a formal paper.
Questions:
- Define the price elasticity of demand? What information does it provide? How is it calculated?
- Define the income elasticity of demand? What information does it provide? How is it calculated?
- Define the cross-price elasticity of demand? What information does it provide? How is it calculated?
- What is total revenue? How is it calculated?
- Define elastic, inelastic, and unitary elasticity means. How are these related to total revenue? Explain your answers.
- With respect to the price elasticity of demand, construct a graph using the data in Figure1. Illustrate the ranges on the demand curve that indicate elastic, inelastic, and unitary elasticity. Explain your answers. Enter non-numerical responses in the same worksheet using textboxes.
- Calculate the total revenue for each level of demand and post into the table, Figure 1. (Copy and paste this table into the Microsoft Word document that will form part of your submission.)
- Using the midpoints formula presented in the textbook, calculate the price elasticity coefficient for each price level, starting with the coefficient for the $4 to $6 level. For each coefficient, indicate each type of elasticity: elastic demand, inelastic demand, or unitary demand. Post your answers into the table, Figure 1.
- Assume that the income of consumers changes by 10%, and as a result the quantity demanded for Good A changes by 8%. What is the income elasticity of demand for Good A? What does this mean for your company?
- Assume that the price of competing Good B decreases by 5% and as a result, the quantity demand for Good A decreases by 8%. What is the cross-price elasticity for your product? What type of goods are Good A and Good B?
Figure 1: The Demand Schedule for Barbeque Dinners
Price | Quantity Demanded | Total Revenue | Elasticity Coefficient | Elastic or Inelastic | |
| $4 | 100 | __________ | XXXX | XXXX | |
| 6 | 80 | __________ | __________ | __________ | |
| 8 | 60 | __________ | __________ | __________ | |
| 10 | 40 | __________ | __________ | __________ | |
| 12 | 20 | __________ | __________ | __________ | |
| 14 | 1 | __________ | __________ | __________ |
| Price Elasticity | Income Elasticity | Cross-Price Elasticity | |||
| |ep| > 1 | Elastic | ei < 0 ei > 0 | Inferior good Normal good | ec < 0 | Complementary good |
| |ep| < 1 | Inelastic | 0< ei < 1 ei > 1 | Necessity Luxury | ec > 0 | Substitute good |
| |ep| = 1 | Unit Elastic | ||||
Technical Questions
Using the elasticity table (above), you have the following information for your product: (1) The price elasticity of demand is -2.0; (2) The income elasticity of demand is 1.5; and, (3) The cross-price elasticity of a related good is -3.5. What can you determine about consumer demand for your product from this information?â¨â¨
Using the elasticity table (above), you have the following information for your product: (1) The price elasticity of demand is -.9; (2) The income elasticity of demand is .5; and, (3) The cross-price elasticity of a related good is 2.0. What can you determine about consumer demand for your product from this information?
What are the three determinants of price elasticity of demand
What are the three determinants of price elasticity supply?
Name and describe the three kinds of product innovation.
Name and describe a marketing approach (that we discussed in class) that can be used to understand consumer behavior and/or estimate demand.
Name and describe a statistical approach (that we discussed in class) or technique that can be used to understand consumer behavior and/or estimate demand.
Name a psychological model (that we discussed in class) that can be used to understand consumer behavior and/or estimate demand.
Name and describe the six types of consumers.
How do fixed and variable costs differ in the short-run and long-run?
Jim is considering quitting his job and using his savings to start a small business. He expects that his costs will consist of a lease on the building, inventory, wages, electricity, and insurance.
11A. Identify which costs are explicit and which are opportunity (implicit) costs.
11B. Identify which costs are fixed and which are variable.
What is the law of diminishing returns? What are economies of scale and diseconomies of scale? Be sure to note the terms apply to the short run and the long run.
Application Questions
1. How can entrepreneurs shift elasticity of demand and elasticity of supply? Draw on the three determinants for each in your answer.
2. How can entrepreneurs be innovative in production for the short-term and the long-term? Draw on concepts like diminishing returns, diseconomies of scale, and economies of scale in your answer.
