ECN 4
Describe and show graphically cases of entry and exit on the demand side of the product market.
As more people enter a market, the demand line shifts right. As they leave, the demand line shifts left.
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 demand quantity of another product goes up.If the sign is positive, but the value of ε 1x2 is small, then goods are substitutes but it takes a big price increase in one to cause a significant substitution to the other.
Write out and explain the equation economists use to measure own price elasticity
E= abs(change%Q1/ Change %P1) the absolute value of the change in percentage of the quantity demanded divided by the change In percentage of the price at the same point.
Explain why own price elasticity is such a big deal in the world of policy
Economists want to know the responsiveness to changing conditions so they can predict the effects of such changes.
Identify and explain a private policy case
A firm, such as J. Crew, may use price elasticity data to greater their profit by gauging how they can increase the price of their popular vest. If the responsiveness is inelastic, they will increase the price everywhere. If it is elastic, they may decrease the price so more people buy it while it is cheap.
Respond to the following statement: this is one hell of a model. it is loaded with great answers to policy puzzles.
A single model cannot solve policy, it just helps us to think systematically and analyze policy questions correctly instead of simplistically.
Identify the sign of the income elasticity equation when a good is normal, when a good is inferior.
normal good: + inferior good: -
Explain how the number and quality of substitutes affect own price elasticity. give example and explain
The more number or quality of substitutes there are to a product, the more elastic the product becomes. If the price of McDonalds burgers goes up, you can buy burger king instead.
Give an example of tastes as a shift variable. Demonstrate graphically how the market will respond in your example.
If you prefer this product, the demand line will shift to the right.
Give examples of elastic and inelastic demand.
Price of cars goes up, less people buy them. This makes them elastic. Price of water in a desert goes up, people still buy it. This makes it inelastic.
Contrast elastic and inelastic demand
Quantity demand significantly changes when price changes when it is elastic and is the opposite when it is inelastic.
Identify and explain a case in which simple minded thinking that does not consider own price elasticity issues can lead to unintended results
Raise the price of food at a restaurant without looking at price elasticity issues to raise revenue when there are plenty of other substitutes, so they really lose revenue.
Interpret the expression "Price is no object"
"Price is no object," means that the demand is perfectly inelastic. You will pay whatever it takes to have this good or service.
Explain why the equation uses percentage change rather than absolute change.
Percentage change is more accurate sense of the degree of change when measuring the elasticity.
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.
Identify and explain a public policy case
Government increases tax on smoking, since it is inelastic. They will raise revenue or people will quit.
Critique the following logic: if you charge more you make more revenue
If you charge more on an inelastic good you will make more revenue, but if it is elastic you wont. That is not always the case.
Critique the following assertion: interdicting supply is the solution to the nations drug problem
Interdicting the supply side neglects the demand side. If there are fewer drugs, addicts will just pay more for the small supply that is out there.
Define: cross price elasticity of demand.
It means how the price of one good is affected by a change in price of another related good.
Describe the relationship between own price elasticity and total revenue as price changes.
Revenue is determined by demand elasticity. If demand is elastic, when price is raised revenue will fall since quantity demanded will fall at a high percentage. If demand is inelastic, when price is raised revenue will raise since quantity demanded will fall at low percentage.
Given two product demand graphs drawn on identical axes, identify which is the more elastic demand.
Steeper slope means more inelastic.
Define: substitutes
Substitutes are two goods that can be used interchangeably for each other
Explain the concept of tax incidence and tax burden
Tax burden: the actual weight of the tax. Tax incidence: who really pays the tax and who bear the burden.
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 the own price elasticity of demand that suppliers in a perfectly competitive market face
They face a perfectly elastic demand line.
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.
Explain why an absolute value sign is used in the equation
Because the demand line moves inversely to quantity.
The supply of drugs in the city has been reduced by government crack down but drug related crime is up. explain. is interdicting drugs a bad idea?
By decreasing supply of drugs in city, the price gets driven up, so more crime occurs to buy the more expensive drugs. Demand is inelastic since there is no good substitute. It is not a bad idea, but it needs to focus on both the supply and demand sides of drugs.
Define: complements.
Complements are two goods that are often used by consumers together.
Explain each of these E >1 E<1 E=1 E=0
E > 1 means it is elastic because the quantity demanded changed a large amount compared to the price so it is more responsive. E< 1 means it is inelastic because it is less responsive since the quantity demanded did not change that much. E=1 means there is unitary elasticity and the percentage change in price directly changes the percentage change in quantity demanded. E=0 means it is perfectly inelastic.
Define elastic and inelastic demand
Elastic demand: responsive. The quantity demanded if a good significantly changes in its own price. Inelastic: not responsive. Quantity demand of a good does not respond very significantly to a change in its own price.
Show graphically and describe the case of perfectly elastic demand. Show graphically and describe the case of perfectly inelastic demand.
Elastic=horizontal Demand Inelastic=vertical Demand
Describe the relationship between own price elasticity of demand and advertising.
Firms affect price elasticity by advertising its necessity and decreasing customers price sensitivity and increase brand loyalty.
Draw and label market graphs for three related goods. Specify the relationships. Show how a change 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.
Hamburger, French Fries, Pizza (Pages 82)
Explain how the price of the good relative to a persons wealth and income affects own price elasticity
If a good's price is raised and it is still very low relative to income, it is inelastic, however if the price is very high relative to income it is very elastic.
Define: inferior good.
If as your income goes up your demand for a product goes down, or if as your income goes down your demand for a product goes up, such goods are called inferior good. For example, generic brand product and name brand product.
Define normal good.
If income goes up, you'll buy more of the good at any given price so the demand line shifts right. If income goes down, you will buy less at any given price so the demand line shifts left.
Explain how the time frame affects own price elasticity
If the time frame is long, the good is more elastic. If it is over a short period of time, it is more inelastic, so people will pay more. If there is a long period of time, entrepreneurs will come up with better or cheaper alternatives.
Describe with an example how own price elasticity of demand can affect the impact of a tax with respect to revenue generated and changing market behavior.
If you raise the tax on tobacco, you can generate revenue from smokers. However, it will discourage new consumers therefore change the market behavior.
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.
Comment on the following statement: Market demand movements depend on the net effect of all the individual changes. Identify the sources of such changes. Note whether these are the only determinants of the market level of demand. If not, identify another source of market demand shifts.
It is true because all individuals' demands for a good or service is the market demand for that good or service. Sources include tastes, income , the prices of related goods.If attitudes generally move in the same direction, the market demand will move in that direction.
Identify 4 factors that determine own price elasticity of a good or a service
Necessity v. luxury. Number and quality of available substitutes. Time frame. Price relative to wealth and income.
Identify what own elasticity of demand measures
Own price elasticity is a measure of the responsiveness of the quantity demanded of a good to change in its own price.
Given several individual demand lines, construct the market demand line.
Page 84
Using a simple version of our decision rule as a departure, why does the demand line slope down.
Product demand line slopes down because as price goes up for a product, you are still getting the same marginal utility from it. You are out of balance. To maximize marginal utility to become balanced again, you must consume less since it is an inverse relationship.
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 individuals' demands for a given good or service and the market demand for that good or service.
The sum of all individuals' demands for a good or service is the market demand for that good or service.Changes in individual's demands due to changes in tastes , income, or prices of related goods can case a shift in the market demand.
With cross price elasticity as a reference point, comment on the assertion that when it comes to policy, be it public or private, anyone who says it's simple is either simple minded or thinks you are.
The world is a complex web of connections. Complex world means complex problems. Solutions are rarely obvious, never perfect, and sometimes complex. When you tweak a web you cannot know all the consequences it may have.
Develop a case (different from the one covered) that demonstrates the importance of cross price elasticity to private policy making. Include internal and external cross price effects.
movie tickets,popcorn, and DVD
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)
