ECON 201 Lecture Notes - Lecture 7: Margarine, Demand Curve

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7 Oct 2016

School

University of Calgary

Department

Economics

Course

ECON 201

Professor

Marian Miles

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Document Summary

The midpoint method: if you try calculating the price elasticity of demand* between two points on a demand curve, you will quickly notice an annoying problem. The elasticity from point a to point b seems different from the elasticity from point b to point a. Instead of using the values for point a or point b in the denominator when using the formula, you use the midpoint so that the direction doesn"t matter. Xnew xold = where xaverage is the sum of xnew and xold divided by two to get the average. Xaverage this for the values of both price and quantity to get percentages. Economists classify demand curves according to their elasticity. Demand is elastic when the elasticity is greater than 1, so that the quantity demanded moves proportionately more than the price. Perfectly elastic will look like a straight horizontal line.

Related Questions

1. Grand TV Manufacturer wants to increase the quantity of TVs it sells by 8%. If the price elasticity of demand is 4, the manufacturer must:

a. decrease price by 1.5%.

b. increase price by 1.5%.

c. increase price by 2.0%.

d. decrease price by 2.0%.

2. Suppose that an Italian ice cream firm is facing a linear demand curve and that the current price for the Italian ice cream is set at a point where the price elasticity is 0.7. If the firm decreases the product price,

Select one:

a. the demand becomes less inelastic, and total revenue increases.

b. the demand becomes more inelastic, and total revenue decreases.

c. the demand becomes more inelastic, and total revenue increases.

d. the demand becomes less inelastic, and total revenue decreases.

3. Suppose that in a month, the price of movie rentals decreases from $3.25 to $3. At the same time, the quantity of movie rentals demanded increases from 100 to 120. The price elasticity of demand for movie rentals (calculated using the midpoint formula) is:

a. elastic.

b. zero.

c. inelastic.

d. unitary elastic.

4. The price elasticity of demand for color printers is 1.6, and you would like to see the quantity demanded of color printers increase by 32%. Then the percentage change in price should be:

Select one:

a. 15%.

b. 25%.

c. 10%.

d. 20%.

5. The price of apple increases from $1 to $1.10. At the same time, the quantity of apples demanded decreases from 100 to 90. The price elasticity of demand for apples (calculated using the initial value formula) is:

a. 0.9.

b. 0.02.

c. 1.1.

d. 1.

cyanspider596

When the prices of compact discs (you remember those, right?) increased from $10 to $11, the quantity of CDs demanded decreased from 100 to 87. Using the Mid-Point Method (page 99), what is the price elasticity of demand for CDs? Explain why the demand is elastic or inelastic (not just that it is greater or less than one, but what makes it elastic or inelastic)? Show your work. If you are unsure about how to determine percentages, review the appendix to Chapter One. Name a product you regularly purchase for which you have an inelastic demand and one for which you have an elastic demand. What determines whether your demand is elastic or inelastic for these products?

2. In the United States, 2007 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. 2006 2007 Quantity demand (bushels) 2.2 billion 2.0 billion Average price (per bushel) $3.42 $4.26 a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 2006 and 2007? c. Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a? 3. A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning. a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.

ECON 201 Lecture Notes - Lecture 7: Margarine, Demand Curve

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