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ECON101 Chapter Notes - Chapter 4: Normal Good, Opportunity Cost, Inferior Good

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limeherring371
20 Feb 2013
School
University of Waterloo
Department
Economics
Course
ECON101
Professor
Emanuel Carvalho

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Document Summary

Answer depends on the responsiveness of the quantity demanded to a change in price. Price elasticity of demand: a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Price elasticity of demand = percentage change in quantity demanded. To calculate the price elasticity of demand, we express the changes in price and quantity demanded as percentages of the average price and average quantity. The original price is ,50 and the new price is . 50, so the average price is . price decrease is 5 percent of the average price. The original quantity demanded is 9 pizzas and the new quantity demanded is 11 pizzas, so the average quantity demanded is 10 pizzas. The 2 pizza increase in the quantity demanded is 20 percent of the average quantity. Average quantities give the most precise measurement of elasticity.

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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.

If the elasticity of demand is 3, and the price rises by 15 percent, then

a.) The quantity demanded will increase by 5 percent.

b.) The quantity demanded will fall by 45 percent.

c.) The quantity demanded will rise by 4.5 percent.

d.) The percentage change in quantity demanded will fall as income rises.