ECON101 Lecture Notes - Lecture 5: Inferior Good, Complementary Good, Independent Goods

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chocolatecod698

26 Apr 2017

School

University of Delaware

Department

Economics

Course

ECON101

Professor

Melvin Jesse

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Document Summary

Price elasticity of demand measures the responsiveness of consumers quantity decisions to a change in a products price- how much change in price affects quantity demanded. Consumers very responsive means good is elastic. Elastic is a shallow slope while inelastic would be a steep slope. More expensive, a good is to income, more elastic. Longer the response time window, the more elastic. Midpoint formula is calculating an elasticity between two points on demand curve. (change in quantity/ average quantity)/(change in price / avg price) Coefficient is greater than 1 (abs value) Percent change in quantity > percent change in price. Coefficient is less than 1 (abs) value) Percent change in quantity < percent change in price. Coefficient is equal to 1 ( abs value) Percent change in quantity = percent change in price. Change in price does not change revenue. Changing the price significantly causes total revenue to decline.

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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.

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.

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The demand curve for a good is very unlikely to be perfectly vertical because

A) scarcity and limited income restrict the ability of consumers to afford goods as they become very expensive.
B) as the price of a good rises to high enough levels, the incentive for other suppliers to invent new substitutes for the good increases.
C) consumers generally do not care about the price of the goods they consume.
D) both a and b are true.

As the period for firms to expand output is lengthened, the elasticity of the market supply curve will

A) approach zero.
B) increase.
C) decrease.
D) remain the same since time does not affect the elasticity of market supply.

The price elasticity of demand for automobiles measures the responsiveness of

A) consumer purchases to a change in the price of automobiles.
B) consumer purchases to a change in the quality of automobiles.
C) supplier production levels to a change in the price of automobiles.
D) consumer purchases of automobiles to a change in their income.

Which of the following is true regarding the price elasticity of demand?

A) Demand is generally more elastic in the long run than in the short run.
B) Along a single demand curve, demand elasticity decreases as you move down the curve (to lower prices).
C) a flatter demand curve (has a less steep slope) is relatively more elastic than a demand curve that has a steeper slope.
D) All of the above are true.

5. (Answer ONE of the Following Question)

Economists maintain that the price of a product does not affect demand. How can this be true?
National defence is considered a public good because there appear to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?
Congressman Local stuff always votes for a balanced budget amendment to the U.S. Constitution. He also always votes for spending bills supported by the leadership of his political party. Is this rational?

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ECON101 Lecture Notes - Lecture 5: Inferior Good, Complementary Good, Independent Goods

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