SUPA Economics Chapter 4

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.

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.

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.

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

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

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.

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.

What are compliments?

Complements are two goods that are often used by consumers together. Ex. Burgers and fries.

Give examples of elastic and inelastic demand

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 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.

Ceteris paribus, identify which kind of good would exhibit a more inelastic demand: a necessity or a luxury

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.

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

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

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

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)