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ECC1000 Study Guide - Quiz Guide: Midpoint Method, Margarine

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School
Monash University
Department
Economics - ECC
Course
ECC1000
Professor
James Bugden

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Elasticities and applications
Definition is in terms of percentage changes – Know how to interpret it.
• Elasticity – a measure of the responsiveness of quantity demanded or quantity supplied
• Goods with close substitutes tend to have more elastic demand because it’s easier for consumers to switch from
that good to others eg; butter and margarine à A small increase in price of butter, causes the quantity sold to fall by
a large amount
• Necessities tend to have inelastic demands whereas luxury goods have elastic demands
• Narrow markets have more elastic demand than broadly defined markets à easier to find close substitutes for
narrowly defined markets
Understand various elasticities – Price elasticity of demand (supply), cross price elasticity of demand, income elasticity of
demand
Price elasticity of demand
• A measure of how much the quantity demanded of a good responds to a change in the price of that good
• Calculated as the % change in quantity demanded / % change in price
Price elasticity of supply
• A measure of how much the quantity supplied of a good responds to a change in the price of the good
• Calculated as the % change in quantity supplied / % change in price
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Document Summary

Definition is in terms of percentage changes know how to interpret it. Understand various elasticities price elasticity of demand (supply), cross price elasticity of demand, income elasticity of demand. A measure of how much the quantity demanded of a good responds to a change in the price of that good. Calculated as the % change in quantity demanded / % change in price. A measure of how much the quantity supplied of a good responds to a change in the price of the good. Calculated as the % change in quantity supplied / % change in price. A measure of how much the quantity demand of one good responds to a change in the price of another good. A measure of how much the quantity demanded of a good responds to a change in consumers" income. Use the mid-point method when asked / otherwise choose the base that is clear from the question. (page 98)

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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 consumers’ 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.

a) As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer?

b) After Malia's income increased from $12,000 to $18,000 a year, her purchases of album downloads increased from 10 to 40 downloads a year. Calculate Malia's income elasticity of demand for albums.

c) Expensive restaurant meals are income-elastic goods for most people, including Sanjay. Suppose his income falls by 10% this year. What can you predict about the change in Sanjay's consumption of expensive restaurant meals?