Lecture 7 Flashcards
What is the importance of knowing about the responsiveness of demand?
so that appropriate policies can be designed to alter it if required.
Responsiveness are referred to as the elasticity of demand
How is elasticity of demand reflected?
it is reflected in the shape and slope of the demand curve.
What is price elasticity of demand?
Responsiveness of quantity demanded to a change in price.
For many goods and services, a price increase means that people buy less, but in some cases the price rise has very little impact on quantities consumed.
What is demand said to be if the quantity demanded remains constant when the price changes?
Perfectly inelastic.
What is an example of a good with low elasticity of demand?
Insulin
Insulin is of such importance to some diabetics that a price change is unlikely to have much effect on the amount patients will purchase
What does it mean if the elasticity of demand is 1?
If the percentage change in the quantity demanded equals the percentage change in price, the elasticity of demand is 1
Demand is unit elastic
What is the meaning of a price elasticity of demand less than 1?
When the percentage change in the quantity demanded is less than the percentage change in price
Demand is inelastic
Give two examples of goods that are typically inelastic in demand.
Petrol and tobacco
What is the interpretation of a price elasticity of demand of infinity?
If the quantity demanded is infinitely responsive to a price change
Demand is perfectly elastic
When is demand considered to be elastic?
When the percentage change in the quantity demanded exceeds the percentage change in price, the price elasticity of demand is greater than 1 and demand is said to be elastic
Cereal and shampoo are examples of goods typically with elastic demand
In health care, the demand for some forms of cosmetic surgery is elastic.
Price Elasticity of Demand
What does it mean if the price elasticity of demand (PED) is greater than 1?
Demand is price elastic (demand is sensitive to price changes)
What does PED = 1 indicate?
demand is unit elastic
What does PED < 1 indicate?
demand is price inelastic
What is elasticity concerned with?
absolute value
Elasticity is not the slope (the slope measures the absolute change in one variable given an absolute change in another variable and depends on the unit in which the good is measured
What is the formula for price elasticity of demand?
Percentage change in quantity demanded divided by percentage change in price
[Change in Quantity] / [(Q1 + Q2)/2] _________________________________________________
[Change in Price] / [(P1 + P2)/2]
What is the PED:
Consider the demand on paracetamol, initially the price is 5 per pack and 17 packs are sold per week (point A). The price increases to 6 per pack and the quantity demanded decreases to 15 pack per week (point B).
- %change in quantity demanded= ΔQ/Qave = (-2/16) = - 0.13
- %change in Price= ΔP/Pave = (1/5.50) = 0.18
- PED= -0.13/0.18= - 0.72
What is the economic interpretation for PED= (-0.72)?
Demand is not very sensitive to price changes
What is the relationship between price and quantity demanded in this scenario?
PED= -0.72
1 percent fall in price leads to 0.72 percent rise in quantity demanded
What is the factors that affects price elasticity of demand?
- Availability of substitute goods
- Percentage of income
- Time period
- Necessity
- Who pays
- Brand loyalty
How Availability of substitute goods affects price elasticity of demand?
The more and closer the substitutes available, the higher elasticity is likely to be
as people can easily switch from one good to another if an even minor price change is made.
How Percentage of income affects price elasticity of demand?
goods that take a large portion of a consumers income tend to have greater elasticity
How does the time period affect price elasticity of demand?
Elasticity tends to be greater over the long run
As consumers have more time to adjust their behavior and to search for substitutes.
What is the relationship between necessity and price elasticity of demand?
The more necessary a good is, the lower the elasticity
as people will attempt to buy it no matter how much the price is, such as in the case of insulin for those who need it.
What factor affects demand elasticity when the purchaser does not directly pay for the good they consume?
Who pays
such as in the case of employer-sponsored health insurance
What factor affects demand elasticity when consumers are attached to a certain brand?
Brand loyalty
Why is the overall demand for health care services expected to be relatively inelastic?
Few close substitutes for medical services
What is the general relationship between being sick and price sensitivity?
Being sick usually reduces price sensitivity.
What is an exception to the rule that being sick reduces price sensitivity?
Elective surgery like plastic surgery.
What do most studies find about patient sensitivity to changes in healthcare prices?
Patients are fairly insensitive to changes in healthcare prices.
If demand is price elastic, what will happen to revenue if the price is increased?
Revenue will decrease.
If demand is price inelastic then revenue will
increase if price goes u
What happens to revenue when the price of the influenza vaccine goes up?
Revenue increases
What is the effect of a reduction in the quantity sold on revenue?
Decrease in revenue
Why would increasing the price of the influenza vaccine increase revenue?
Because demand is price inelastic
What is cross-price elasticity of demand?
Percentage change in quantity demanded divided by the percentage change in the price of another related good.
What does the cross-elasticity of demand measure?
The responsiveness of quantity demanded to a change in price of a related good.
How does the cross-elasticity of demand indicate whether goods are complements or substitutes?
If it is less than zero, the goods are complements. If it is more than zero, the goods are substitutes.
What effect does a positive change in price have on quantity demanded for complements?
It brings about a negative change in quantity demanded.
What effect does a positive change in price have on quantity demanded for substitutes?
It brings about a positive change in quantity demanded.
How does the closeness of substitutes affect the cross-price elasticity of demand?
The closer the substitute, the higher the cross-price elasticity of demand.
What is income elasticity of demand?
Percentage change in quantity demanded divided by the percentage change in population income.
What does a positive income elasticity of demand indicate?
Normal good.
What does a negative income elasticity of demand indicate?
Inferior good.
How can the impact of introducing or raising user fees be analyzed?
Using estimates of price elasticity
