SUPA Economics Chapter 4 Objectives

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Which kind of good would exhibit a more inelastic demand?

A necessity. A person will pay whatever price for it. for example, a person will pay for a needed surgery regardless of cost.

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.

cross price elasticity of demand.

how the price of one good is effected by a change in price of another related good.

How does the price of the good relative to a person's wealth and income affects own price elasticity?

if a good is worth a small part of a person's income, it tends to be very inelastic and vice versa.

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

Factors of Own Price Elasticity Demand: Inelastic

necessity, no good substitutes, little time to adjust, price low relative to income

Identify the shift variables in the product demand relationship.

the price of related goods, income and tastes.

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.

equation for income elasticity demand

ε income = (% Quantity Change) / (% Income Change)

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.

Factors of Own Price Elasticity Demand: More Elastic

Luxury, good substitutes, time to adjust, price high relative to income

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.

If you were going to sell a product would you want perfectly elastic or inelastic?- 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.

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.

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

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 effects own price elasticity

if there are many substitutes, the demand is more elastic as there are alternatives.

How does time frame affect own price elasticity?

in a short time frame, if a good is needed immediately, it is more inelastic

Contrast elastic and inelastic demand.

quantity demanded of a good with elastic demand changes with price, while inelastic demand goods remain relatively static

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.

Why is an absolute value sign used in the own price elasticity equation?

the value will always be positive


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