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EC120 Lecture Notes - Lecture 4: Inferior Good, Normal Good

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School
WLU
Department
Economics
Course
EC120
Professor
Oliver Masakure

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3

EC120 Lecture Notes - Lecture 3: Opportunity Cost, Demand Curve, Inferior Good

4

EC120 Lecture Notes - Lecture 4: Inferior Good, Normal Good

5

EC120 Lecture Notes - Lecture 5: Marginal Utility, Demand Curve, Marginal Cost

Document Summary

If demand is elastic, a cut in price leads to an increase in total revenue. If demand is unit elastic, a cut in price leaves total revenue unchanged. The cross elasticity of demand with respect to the price of a complement is negative. Income elasticity of demand measures the responsiveness of demand to a change in income, other things remaining the same, for a normal good, the income elasticity of demand is positive. Supply decisions have three time frames: momentary, short run and long run: momentary supply refers to the response of the quantity supplied to a price change at the instant that the price changes. Short run supply refers to the response of the quantity supplied to a price change after some of the technologically feasible adjustments in production have been made. Long run supply refers to the response of the quantity supplied to a price change when all the technologically feasible adjustments in production have been made.

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Related Questions

27. Which of the following statements is correct? a. The greater the price elasticity of demand, the more likely the product is a necessity. b. The greater the price elasticity of demand, the smaller the responsiveness of quanti demanded to price. The greater the price elasticity of demand, the greater the percentage change in price over the percentage change in quantity demanded. d. The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to price.

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.