SUPA Economics Chapter 4 Objectives
Give and explain a personal example of a normal good.
gasoline. if i had more money, i would use more gasoline (and oil and other compliments)
Given two product graphs drawn on identical axes, identify which is the more elastic demand.
The more elastic demand is the graph that has a line that is closest to being a horizontal, or straight across line.
Describe and show graphically cases of entry and exit on the demand side of the product market.
as a new firm enters the market, the quantity demanded for each individual firm will go down, due to competition. this will cause a lower overall price for that good. as a firm exits, there is less competition, allowing the price to go up as there are less substitutes.
Show graphically and describe the case of perfectly inelastic demand.
a vertical demand line, p as vertical axis, q as horizontal
Describe the relationship between two goods that have a negative cross price elasticity. Give an example.
as the price of one good goes up, the price and qd of another good will go down, ex: burgurs going up in price will reduce the price and demand of fries. they are compliments.
Describe how shifting demographics can cause entry and exit and strongly affect product market demand.
during the baby boom, many families demanded baby goods, this drove the Qd for baby goods up.
Given one of these cases, e > 1 or e < 1 or e = 1, identify and explain the case.
e greater than 1: demand is elastic, responsive, qd will change greatly with price change e less than 1: demand is inelastic, unresponsive, qd will not change with price change e=1: unitary elasticity, price changes are equaled by changes in qd
Explain how the price of the good relative to a person's wealth and income affects own price elasticity. Give and explain an example.
if a good is worth a small part of a person's income, it tends to be very inelastic and vice versa. for example, a gumball going up from 10 cents to 20, a 100% increase, does not decrease the demand the same way a 100% increase in the price of a car or house would.
Explain why own price elasticity is such a big deal in the world of policy.
it is so important since it is imparative that firms know if their products are elastic or inelastic as it will determine how price changes will affect QD
Identify four factors that determine the own price elasticity of a good or service. Explain each. Describe the relationship among these four factors.
necessity v luxury # and quality of available substitutes time frame price relative to wealth and income all explained in previous cards
Identify the sign of the income elasticity equation when a good is normal, when a good is inferior.
normal good: + inferior good: -
Give and explain a personal example of an inferior good.
regular gasoline. if i had more money, i would purchase premium ethanol free fuel.
Define: cross price elasticity of demand.
this means how the price of one good is effected by a change in price of another related good.
Interpret the expression "price is no object" in economic terms.
this means that the good in question has perfectly inelastic demand.
Contrast elastic and inelastic demand.
to quantity demanded of a good with elastic demand changes with price, while inelastic demand goods remain relatively static
Give examples of how public or private policy is affected by demographic changes.
when the baby boomers entered the school system, there was a much greater demand for education. this resulted in policies to enlarge and replace the school system.
Give the equation that measures the cross price elasticity of demand.
ε 1x2 = (% Quantity Change Of Good 2) / (% Price Change Of Good 1).
Give the equation for income elasticity.
ε income = (% Quantity Change) / (% Income Change)
Identify the own price elasticity of demand that suppliers in a perfectly competitive market face.
In a perfectly competitive market, suppliers will face a perfectly elastic demand line.
Write out the full product demand relationship in functional form including the shift variables.
Q1D = D(p1 | pr, I, T); pr = price of related goods, I = income & T = tastes.
Describe the relationship between own price elasticity of demand and advertising.
Advertising can be used to make the own price elasticity of demand more inelastic or make the product more of a necessity.
Define: complements.
Complements are two goods that are often used by consumers together. Ex. Burgers and fries.
Write out and explain the equation economists use to represent the measure of own price elasticity.
E=abs((%quantity change)/(%own price change))
Give examples of elastic and inelastic demand. Explain.
Elastic- oranges (when the price goes up, qD drops significantly) Inelastic- gasoline (when the price goes up, qD remains relatively the same
Describe ways in which firms can try to influence the own price elasticity of demand for their product.
Firms can try to influence the own price elasticity of demand for their product by using advertising to promote the ideas that there are no substitutes for their product and their product is a necessity.
Identify what own price elasticity of demand measures.
Own price elasticity measures how responsive the quantity demanded is to a change in a good's own price.
Define: substitutes.
Substitutes are two goods that can be used interchangeably for each other. Ex. Coke and Pepsi.
Identify the shift variables in the product demand relationship.
The shift variables in the product demand relationship are the price of related goods, income and tastes.
Identify which case, perfectly elastic or perfectly inelastic demand, you would wish for if you were going to sell a product - assume ceteris paribus. Explain.
You would hope for a perfectly inelastic demand, because in that case, your product's demand would not be easily changed if you changed the price.
Explain how the market system is like a spider's web.
a change in the price of one good will affect the whole market, some parts more than others, like a ripple in one corner of a spider web will travel outwards and weaken, but still affect the whole web.
Show graphically and describe the case of perfectly elastic demand.
a horrizontal demand line, p as vertical axis, q as horizontal
Ceteris paribus, identify which kind of good would exhibit a more inelastic demand: a necessity or a luxury. Explain. Give and explain an example.
a necessity would be inelastic. if it is needed, a person will pay whatever price for it. for example, a person will pay for a needed surgery regarless of cost.
Draw and label market graphs for three related goods. Specify the relationship. Show how a chagne in supply conditions for one of the goods will affect the equilibrium price and quantity exchanged in all three markets. *Note: Assume that the second and third goods are independent of one another, i.e., set e2x3 = 0. Explain why this assumption simplifies the analysis.
a shift up in the supply of hamburgers will lead to less being demanded. in turn, french fry demand will shift inward and price will decrease. this is because fires are a compliment to hb's. however, demand for pizza will shift out and price will go up, since it is a substitute to hb's, but is not related to fries except through hb's.
Describe the relationship between two goods that have a positive cross price elasticity. Give an example.
as the price of one good goes up, the qd of another product goes up, also raising its price. for example, if the price of bacon goes up, more people may buy corned beef hash, raising its qd and price.
Define: elastic demand. Define: inelastic demand.
elastic- quantity demanded changes drastically to a change in price Inelastic- quantity demanded does not change significantly in response to price chage
Describe the relationship between own price elasticity and total revenue as price changes.
if a product is inelastic, a raise in price will result in more revenue. if it is elastic, a raise in price will drive qd way down, causing less revenue.
Define: inferior good.
if income goes up, the qd for a particualr good goes down
Define: normal good.
if income goes up, the qd for a particular good also goes up
Explain how the number and quality of substitutes affects own price elasticity. Give and explain an example.
if there are many substitiurtes, the demand is more elastic as there are alternatives. for example, apples are less elastic due to the other substitute fruits available,
Explain how the time frame affects own price elasticity. Give and explain an example.
in a short time frame, if a good is needed immediately, it is more inelastic
Give an example of tastes as a shift variable. Demonstrate graphically how the market will respond to your example.
in the 70's, the demand for 8 tracks was very high. they were very popular. however, today, there are more efficient and popular forms of media, like CD's. the demand for 8 tracks is much lower as the tastes of the market shifted. this shift would move the demand line right or out.
Describe the connection between cross price elasticity and the concept of a market system as a web of connections.
in the web of a market, all goods have some degree of cross price elasticity. a change in the price of one good will affect the whole market, some parts more than others, like a ripple in one corner of a spider web will travel outwards and weaken, but still affect the whole web.
Describe the relationship between individuals' demands for a given good or service and the market demand for that good or service.
individuals are responsible for a small part of te overall market demand. it is the average demand of all individual's private demand that will determine the overall market demand.
Explain why the equation uses percentage change rather than absolute change. Give an example.
percent change is used as it gives a better sense of the degree change involved. for example, a price change from $1 to $ 2 is a 100% change, but only adds a dollar. a change from $101 to $102 is also a dollar, but is less than 1%
Describe the relationship betwen two goods that have a negative cross price elasticity, two goods that have a positive cross price elasticity, and two that have a zero cross price elasticity. Give an example of each case.
positive and negative are described above. zero cross price elasticity is when a change in price of one good has no relation to the qd of another. an example would be the reaction to the qd of coconuts if the price of tires went up.
Define: price taker. Explain why all participants in the markets are price takers under perfect competition.
the market sets the price, you have no control over what you pay. this is true since no consumer can control the price of a good
Explain why an absolute value sign is used in the own price elasticity equation.
the value will always be positive, so the absolute value sign eliminates a negative answer
Critique the following assertion: Interdicting supply is the solution to the nation's drug problem.
this is not true. there is a demand side as well. the demand for drugs is very inelastic. with a restricted supply, users will pay more to keep getting drugs, the dealers will have to work harder, but will gain much higher revenue.
Critique the following statement: Some things are inherently inferior goods.
this is not true. what one person may think is inferior might be normal for another. for example, i may get more utils out of ramen noodles than steak, making the noodles normal and the steak inferior. the rest of the world probalby thinks the opposite.
Critique the following logic: Assuming fixed costs, if you charge more you make more.
this is true if the good is inelastic. you will get more profit from the same number of goods sold. if the good is inelastic, profit may go down with a higher price due to less customers.
Comment on the following statement: Market demand movements depend on the net effect of all the individual changes. Identify the sources of such changes.
this is true. if a whole group of people shift their demand to another product, it will change the overall market demand. if one person changes their demand, the market will not be moved significantly. sources include changes in supply and overall tastes for a product (shift variables)