Lecture 7: Supply and Demand, Part 4

Question 1

Determinants of Price Elasticity of Demand

Answer 1

existence of substitutes: the more substitutes available for a product, the more elastic its demand
luxury or a necessity: the demand for luxuries is relatively elastic
importance of the product in the consumer’s total budget: the greater the portion of the consumer’s budget, the more elastic the demand
definition of the market: the more widely defined the market, the more inelastic the demand, e.g. food vs. green beans
time period under consideration: the longer the time period, the more elastic

Question 2

Elasticity and Total Revenue

Total revenue (TR) is equal ….

if demand is elastic, ……
if demand is inelastic, ………

Answer 2

Total revenue (TR) is equal to price times quantity sold.

if demand is elastic, a rise in price causes a fall in TR
if demand is inelastic, a rise in price causes TR to increase

Question 3

Price discrimination refers to charging………..

Answer 3

Price discrimination refers to charging different customers different prices for the same product, e.g. senior citizens discounts on movie tickets. Firms can increase their profits by charging a higher price to customers with inelastic demand and a lower price to customers with demand that is elastic.