EC120 Chapter Notes - Chapter 5: Midpoint Method, Margarine

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12 Mar 2016

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Chapter 5- supply and demand i: how markets work. Elasicity- a measure of the responsiveness of quanity demanded or quanity supplied to one of its determinants. Something is considered elasic if the demand changes substanially based on change in price. Percentage change in quanity demanded / percentage change in price. The midpoint method: more precise way of calculaing ped (q2 q1) / [(q2 + q1) / 2] _____________________ (p2 p1) / [(p2 + p1) / 2] Demand is elasic when it is > 1. Demand is inelasic when it is < 1. Total revenue- price * quanity: demand inelasicity causes increase in total revenue as price increases, demand elasicity causes decrease in total revenue as price increases. Other elasicity: the income elasicity of demand- measures how quanity demanded changes as consumer income changes. = percentage change in the quanity demanded / percentage change in income.

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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.

For each case, choose the condition that characterizes demand: elastic demand, inelastic demand, or unit-elastic demand.

a. Total revenue decreases when the price increases.

b. The additional revenue generated by an increase in quantity sold is exactly offset by revenue lost from the fall in price received per unit.

c. Total revenue falls when output increases.

d. Producers in an industry find they can increase their total revenues by coordinating a reduction in industry output.

e. 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?

f. 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.

g. 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?

chocolatecamel690

1. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

The availability of close substitutes
Whether the good is a necessity or a luxury
How broadly you define the market
The time horizon being considered

A good without any close substitutes is likely to have relatively inelastic or elastic demand since consumers cannot easily switch to a substitute good if the price of the good rises?

2. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

a. Diamond necklace

b. Amputation procedures for diabetes sufferers

3. The price elasticity of demand for good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

Categories:	Most Elastic	In Between	Least Elastic
Food
Red bell peppers
Vegetables

4. The price elasticity of demand is also affected by the given time horizon.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the gasoline demand is _______ elastic in the short run than in the long run.

a. less

b. more

c. no more, no less

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EC120 Chapter Notes - Chapter 5: Midpoint Method, Margarine

EC120 Full Course Notes

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