# q PRICE ELASTICITY OF DEMAND:

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 q PRICE ELASTICITY OF DEMAND: Definition of Price Elasticity of Demand m Price elasticity of demand is a measure of the effect of a change in price of a good/service in terms of quantity demanded. It measures the responsiveness of demand to a change in price. Definition: Earlier we discussed how changes in demand can occur as a result of a change in price. Looking at the price elasticity of demand involves looking at the degree to which a change in price can result in a change in demand. It is important that the term price elasticity of demand is understood properly, and should be precisely defined. The responsiveness of quantity demanded to price changes is the price elasticity of demand. Mathematically, it is expressed through the percentage change in quantity demanded, divided by the percentage change in price. If a firm raises its prices, revenue will be affected. However, whether total revenue rises or falls depends on the characteristics of the product and the attitudes of buyers. The word to describe the size of the change in price is elasticity. If the product is elastic, then the total revenue (price X quantity) will shift significantly when the price is changed. Just think of an elastic band - large change. However, if the product is inelastic, then the total revenue shift will be small following a change in price. Content: ELASTIC: Definition of Elastic m Elastic goods are those whereby a change in price will have a greater than proportional change in demand price changes have a significant influence on demand. Definition: A good has elastic demand when there is a strong response of the quantity demanded to a change in price. Elastic demand is sometimes written as relatively elastic demand. A good has relatively elastic demand when the increase in quantity demanded is proportionately greater than the fall in price. EXAMPLES: Luxury goods have an elastic demand. The price of airline tickets are considered elastic because price rises generally lead to more than Creative Classroom 151

2 proportionate decreases in demand. This means that an increase in price will result in considerably less of a fall in consumption of the good/ service. If the good being produced has an elastic demand then to increase revenue the business should lower price. This does not mean that profits will be higher. If the price of the good is increased the total revenue will fall. Diagram: For the INELASTIC: Definition of Inelastic m Inelastic goods are those whereby a change in price will have a less than proportional change in demand price changes do not have a considerable impact on demand. Definition: Conversely, a good is relatively inelastic if there is a less than proportionate change in the quantity demanded to a change in price. A good has inelastic demand if there is a weak response in demand to a change in price. If the good being produced has an inelastic demand then to increase revenue the business should increase the price. This means that profits will be higher. If the price of the good is decreased the total revenue will fall. Diagram: For the 152 Creative Classroom

3 EXAMPLES: Most necessities have an inelastic demand curve. Other examples of goods with inelastic demand include alcohol and cigarettes. These are both considered addictive (to differing extents), and thus any price change is unlikely to have a significant impact on the quantity demanded. This is because people who consume these products crave and demand the goods, and are willing to pay almost any reasonable price to do so. Hence, price increases and taxes (such as the recent alcopops and tobacco taxes) have a minimal impact on demand and increase the tax revenue for the government and higher revenue for firms. UNIT ELASTICITY: Definition of Unit elasticity m Unit elasticity refers to a particular impact of a change in price on demand. m Unit elastic goods are those whereby a change in price will have an equally proportional effect on demand. Definition: A good is unit elastic if there is a proportional change in demand to a change in price. For example, a price increase of 10% will mean demand will fall by 10%. If the price of the good is decreased or increased then the total revenue will remain the same. Unit/unitary elasticity is a theoretical point. Diagram: For the Creative Classroom 153

4 CALCULATIONS FOR ELASTICITY: There are three main methods used to calculate price elasticity, these are the total outlay, point, and arc methods. USING TOTAL OUTLAY METHOD: The total outlay method is the easiest way to calculate elasticity. Total outlay, or total expenditure, is calculated by multiplying the price by the quantity demanded at that price and then comparing revenues at different price levels. Relatively inelastic demand occurs when total outlay moves in the same direction as a price change. (Price up, TR up: Price down, TR down.) Relatively elastic demand occurs when total outlay moves the opposite direction to the price change. (Price up, TR down: Price down, TR up.) If total outlay remains the same despite a price change, then the good is unit elastic. (Price up, TR the same: Price down, TR the same.) Tip: Only the total revenue is identified in the syllabus. Price Quantity Total outlay/ expenditure \$20 8 \$160 - Elasticity \$30 6 \$180 Inelastic \$40 5 \$200 Inelastic \$50 4 \$200 Unit elasticity \$60 3 \$180 Elastic Example: A story to remember a specfic issue: ELASTICITY Meet the Price family: Story: there are three brothers, their surnames are Price (standing for prices), One brother is called Indiana Price The second brother is called Edward Price The second brother is called Unicorn Price (a half brother) There is a dance with girls, they symbolise, total price revenue. Meaning: Price standing up or down = price changes - up or down. Indiana Price = Inelastic demand Edward Price = Elastic demand Unicorn Price = Unit demand Girls = total revenue (price x quantity) 154 Creative Classroom

5 Scene 1: Inelastic demand Indiana Price goes to the dance and he stands up. then girls stand up to talk to Indiana. Indiana then sits down, the girls sit down. (total revenue down). Characteristics of Indiana, he is very small guy. Indiana is a chemist. Story: Meaning: Remembering the issues of inelastic demand Indiana Price stands up = The price of a good rises, then the Girls stand up = total revenue (price x quantity) Indiana Price sits down Girls sit down = The price of a good falls, then the = Total revenue falls He is a small guy = The figure for elasticity - less than 1 He is a chemist = Goods that have an inelastic demand are necessities. Indiana, you are a short guy, and all the girls love to be with you. Can we sit down now? Creative Classroom 155

6 Scene 2: Elastic demand Indiana goes home to tell his brother Edward that he should go to the dance. Edward Price then goes to the dance and stands up, sadly, the girls sit down. Edward is a big guy. Edward loves luxury items- he has sports cars and gold chains. Meaning: Remembering the issues of elastic demand Edward Price stands up = The price of a good rises, then the Girls sits down = total revenue falls Edward sits down Girls stand up = The price of a good falls, then the = Total revenue rises. He is a big guy = The figure for elasticity- greater than 1. He loves luxury items = Goods that have an elastic demand are luxuries. Why are the girls sitting down? I am on the dance floor. Eddie, you are a big guy, but the girls would prefer not to be with you. Please sit down so we can stand up. BIG EDDIE IS A LUXURY 156 Creative Classroom

7 Scene 2: Unit elasticity Edward goes home really sad, he tells his half-brother the unicorn that he should go to the dance. Unicorn Price enters the dance room, all the girls are petrified by the pet unicorn. Unicorn Price can stands up or fall to the ground, the girls do not move (Price up or price down, total revenue will remain the same). Unicorn Price yells out that he is Number 1. Tip: Only the total revenue is identified in the syllabus. Meaning: Remembering the issues of unit elasticity demand Unit Price stands up = The price of a good rises (demand is unit elasticity), then the Girls are petrified = total revenue stays the same Unit Price sits down = The price of a good falls, then Girls are petrified = Total revenue stays the same He is Number 1 = The figure for elasticity is equal to 1 The girls don t move even when I stand up or sit down. Girls, don t move, the unicorn is here! Creative Classroom 157

8 g Information overload: Additional details to enhance your extended response answers. USING POINT METHOD: The point method, specifically the midpoint method, uses three rules to determine elasticity. If elasticity of demand is greater than 1, then demand is price elastic. If elasticity is equal to 1, then demand is unit elastic. If elasticity is less than 1, then demand is price inelastic. Value of Elasticity of Demand Elasticity > 1 Elastic 1 Unit Elastic < 1 Inelastic The value of elasticity of demand is calculated by using the following formula: Elasticity = Q /Q P /P Elasticity = (Change in Quantity demanded Quantity demanded) All divided by (Change in Price Price) EXAMPLE: The price of chocolate rose from \$3 a block to \$5 a block, Consumption fell from 10,000 blocks to 5,000. The price elasticity of chocolate is: Quantity demanded = 10,000; Change in quantity demanded = 5,000; Price = \$3; Change in price = \$2 Using the formula, and substituting the above figures: Elasticity = (5,000 10,000) (2 3) = Tip: u Only the total revenue is identified in the syllabus. u Tip: Quantity is always on the top of the equation. Story: Remember Queensland is geographically on the top. Q Queensland is always on the top! As this value is less than 1, = 0.75 In this example, chocolate is price inelastic. Remember, Indiana Price is a small guy. g Information overload! If the answer was greater than 1, chocolate would be price elastic. Remember, Edward Price is a big guy. If the answer was equal to 1, chocolate would be price elastic. Remember, Edward Price is a big guy. Ignore this section if you are still coming to grips with the basics. 158 Creative Classroom

9 g Information overload: Additional details to enhance your extended response answers. USING ARC METHOD: Another method of calculating price elasticity is the arc method. The arc method follows the same rules as the point method Elasticity of demand greater than one is price elastic; Elasticity of demand less than one is price inelastic and Elasticity of demand is equal to 1 it is unit elastic. The arc method is more accurate than the point method. The arc method makes use of the following formula: Elasticity = [(Q2 Q1) (Q averaged)] ALL [(P2 P1) (averaged)] Q1 Q2 Q ave P1 P2 P ave = Initial Quantity Demanded = New Quantity Demanded = Average Quantity Demanded = Initial Price = New Price = Average Price EXAMPLE: The price of petrol rose from \$1 a litre to \$2 a litre and Consumption fell from 100,000 litres to 80,000 litres. Quantity figures: (The figures on the top of the equation) Change in Quantity = 20,000 Q1 = 100,000 Q2 = 80,000 Average Quantity Demanded = 90,000 Price figures: (The figures on the bottom of the equation) Change in Price = \$1 P1 = \$1 P2 = \$2 Average Price = \$1.50 Tip: u Only the total revenue is identified in the syllabus. u Tip: Quantity is always on the top of the equation. Story: Remember Queensland is geographically on the top. Q Queensland is always on the top! Using the formula, and substituting the above figures: 20,000 90,000 ALL Divided by ) = -1/3 = 1/3 (absolute values) As this value is less than 1, it can be seen that petrol is price inelastic. Remember, Indiana Price is a small guy. Creative Classroom 159

10 E EXTREME ELASTICITY POINTS: PERFECT ELASTICITY: A horizontal demand curve indicates a perfectly elastic demand. Consumers demand an endless quantity at a certain price, and nothing above this price. This is only theoretical, and very unlikely to occur in the market place. g Information overload! Ignore this section if you are still coming to grips with the basics. PERFECT INELASTICITY: A vertical demand curve indicates a perfectly inelastic demand, where consumers are willing to purchase the product at any price. Diagram: For the Creative approach: ELASTICITY: Key exam points to memorise: There are two extremes with elasticity. One is a vertical line showing perfectly inelasticity (for demand or supply), the other is a horizontal line which represents something that is perfectly elastic. Note: the word perfectly means vertical or horizontal. Under exam conditions you may get them confused. Perfectly inelastic: You must remember this line is vertical, not horizontal or downward sloping. Just remember the I in the word perfectly Inelastic Remember, when drawing perfectly inelasticity curve It looks like the capital letter I! I Perfectly inelastic: Remember, when drawing perfectly elasticity curve It looks like the capital E having a sleep. The word perfectly in front of inelastic or elastic helps you remember it is an extreme situation. Story: 160 Creative Classroom

13 OTHER EXAMPLES OF ELASTICITY: Elasticity is not limited to demand and supply. Other types of elasticity exist, namely cross-elasticity and income elasticity. Cross-elasticity refers to what are known as related goods (substitute and complementary goods), and the effect of price changes for these products. Income elasticity, however, is refers to the responsiveness of demand when consumer income changes. Both are linked to the demand curve. Q Queensland is always on the top! 1A. INCOME ELASTICITY OF DEMAND - FOR A NORMAL GOOD: Generally, demand for most goods increases (normal good) as consumer income rises. However, the percentage increase in demand is determined by income elasticity. For example, if income rises by 10%, it is highly unlikely that demand for water will rise by more than 10%. It is much more probable that demand for a product such as DVDs will rise by more than 10%. When a rise in income causes a greater percentage rise in demand, then the good is income elastic. However, if a rise in income causes a smaller percentage rise in demand, then the good is income inelastic. For example, if income rose by 10%, but demand for bottled water rose by 1%, then bottled water has income inelastic. The diagram shows demand for two goods. D1 is the original demand for both goods (assume income has increased by 10%). g Information overload! Ignore this section if you are still coming to grips with the basics. Diagram: For the The good represented by D3: It can be seen that demand has increased by more than D2. This indicates that D3 is more likely to be income elastic (large change in demand) compared with the good represented by D2. If D3 is income elastic the demand will increase by more than 10%. The good represented by D2: It can be seen that demand has increased by less than D3. This indicates that D2 is more likely to be income inelastic (small change in demand) compared with the good represented by D3. If D2 is income inelastic the demand will increase by less than 10%. Creative Classroom 163

14 A Creative Story: REMEMERING ISSUE ABOUT INCOME ELASTICITY: When I obtain an increase in income (as if), I will increase my demand for the goods. Look at the following three examples, all of which are based on a ten percent increase in income (as if that s going to happen!) Example 1, salt: It is possible that I will increase my demand for salt, but it is unlikely to be greater than a 10% increase. Therefore my income demand for salt is inelastic. (For Inelastic changes, think Indiana means small change ). The demand curve would move from D1 to D2 Example 2. Movie Tickets: If I receive a 10% increase in income I am likely to increase my expenditure on movie tickets by more than 10%. Note a larger change in demand has occurred as a result of a change in income. Movie tickets are income elastic. (For elastic changes, think Eddie (elastic) is a BIG guy ) BIG EDDIE IS A LUXURY The demand curve would move from D1 to D3. 1B. INCOME ELASTICITY - FOR AN INFERIOR GOOD: As income rises, the demand for a few goods decreases. The consumer views some goods as poor in quality. The consumer would prefer a higher quality good but cannot afford a superior good. Once income rises, the consumer buys the better product and the demand for the inferior good falls. Diagram: For the A Creative Story: REMEMERING ISSUE ABOUT INFERIOR GOODS: Example 3. I am a struggling teacher, so I am buying soup bones to feed my family. If I receive a 10% increase in income then my demand for these bones will decrease because soup bones are an inferior good. I will decrease the demand for soup bones and switch to steak. Steak is a normal good higher increase will cause an increase in demand. The diagram for the inferior good shows that the higher income will cause a decrease in demand, from D1 to D Creative Classroom

15 2. CROSS-ELASTICITY OF DEMAND: (CROSS-ELASTICITY): g Information overload: Additional details to enhance your extended response answers. Cross-elasticity refers to the responsiveness of one good in regards to a change in the price of a different, albeit related, product. Substitute and complement goods are included in this analysis, as these are considered related goods. The following formula is used to calculate cross-elasticity. If the resulting figure is positive, the good is a substitute. If it is negative, then the product is a complementary good. Cross-elasticity of Demand = Percentage change in Quantity demanded for good A Divided by Percentage change in Price of good B. g Information overload! u Tip: Quantity is always on the top of the equation. Story: Remember Queensland is geographically on the top. SUBSTITUTE GOODS: Substitute goods are those which are interchangeable, have the same (or similar) purpose, and can be consumed in place of each other. Examples include butter to margarine and tea to coffee. Generally, if the price of one substitute rises, then the demand for the other good will rise. Applying the example of butter and margarine, this means that if the price of butter rises, then the demand for margarine will also rise. This is shown by the diagram to the right of the text, the demand for margarine will rise because the price of butter has risen. Further, if the price of one substitute falls, then demand for the other good will fall. Again, using the butter and margarine example, if the price of butter falls, then the demand for margarine will decrease. Q Queensland is always on the top! Diagram: For the COMPLEMENTARY GOODS: Complementary goods are those which are consumed together these goods are not used in place of each other. Examples include petrol and cars, and washing machines and washing powder. Generally, if the price for one complement rises, then the demand for both goods falls. For example, if the price of petrol rose, then the demand for large cars would Content: Creative Classroom 165

16 fall. This is shown by the diagram below. If the price of petrol is increased, then the demand for large cars will fall. Conversely, if the price of one complement falls, then the demand for both goods will theoretically rise. The key concept regarding all complementary goods is the existence of a relationship between the goods. For example, it is obvious that cars and petrol have a relationship, yet milk and petrol do not have such a relationship. Diagram: For the A Story To Remember A Specfic Issue:s Complementary/ Substitutes 1. Substitute goods: STORY: When the substitute player (Michael Jordan) comes into the basketball game, people hold up positive signs. Meaning: When the price of Good B increases, then the demand for Good increases (a positive sign). N.B - The maths behind this concept: A positive dividing into a positive equals a positive sign. When the price of Good B is lowered, then the demand for Good A will decrease (a positive sign). N.B - The maths behind this concept: A negative dividing into a negative equals a positive sign. Content: 2. Complementary goods: STORY: Two friends are walking down the street, paying each other compliments but crossing their arms horizontally. The two arms are showing a negative sign. Meaning: If the price of Good B goes up, then the demand for Good A will decrease (positive dividing into a negative = negative sign). N.B - The maths behind this concept: A negative dividing into a positive = negative sign. If the price of Good B goes down, then the demand for Good A will increase (negative dividing into a positive = negative sign). N.B - The maths behind this concept: A negative dividing into a positive = negative sign. HSC Importance for the exams Content Markets- Demand No overlap Just know how to draw the Demand and Supply curves Rating 9/10 Short Answer questions Multiple Choice questions Extended Response questions 166 Creative Classroom

17 q PRICE ELASTICITY OF SUPPLY: CONCEPT OF PRICE ELASTICITY OF SUPPLY: Earlier, we discussed how changes in price impact on the quantity demanded. This involved looking at the degree to which a change in price can result in a change in demand. The same set of points relate to the elasticity of supply. The price elasticity of supply involves looking at the degree by which a change in price can result in a change in the quantity supplied. It is important that price elasticity of supply is understood properly. The responsiveness of quantity supply to price changes is known as the price elasticity of supply (PES). Mathematically, it is expressed through the percentage change in quantity supplied divided by the percentage change in price. The value of elasticity of supply is calculated by using the following formula: Elasticity = Q /Q P /P Elasticity = (Change in Quantity supplied Quantity supplied) All divided by (Change in Price Price) ELASTIC: Definition of Elastic Supply m Elastic goods are those goods for which a change in price will have a greater than proportional change in supplies, and for which price changes have a significant influence on the quantity of supply. Q Queensland is always on the top! Definition: If the supply is elastic (relatively elastic), then the quantity supplied will shift significantly when the price is changed. Just think of the elastic band story we looked at for the elasticity of supply- large change. Creative Classroom 167

18 INELASTIC: Definition of Inelastic Supply m Inelastic goods are those whereby a change in price will have a less than proportional change in supply price changes do not have a considerable impact on the quantity supplied. If the product is inelastic (relatively inelastic), then the shift in the quantity supplied will be small following a change in price. Diagram: EXTREME ELASTICITY POINTS: PERFECTLY ELASTIC: At one end of the spectrum, perfectly elastic supply is where an unlimited quantity of goods can be produced, at the current price. This is a theoretical point and not likely to exist in reality. The supply curve in this example is a horizontal line. Content: PERFECTLY INELASTIC: At the other end of the spectrum perfectly inelastic supply, which is where supply does not change regardless of the price offered. The supply curve is a vertical line. The price of this good is determined by the level of demand. Example: A piece of art from one on the great masters, such as a piece by the post-impressionist artist Vincent van Gogh. 168 Creative Classroom

19 FACTORS AFFECTING ELASTICITY OF SUPPLY: There are three main issues impacting on the elasticity of supply. These are: 1. Time / production period 2. Stock Levels 3. Excess Capacity Content: TIME PERIOD: The length of time after a price change impacts significantly on price elasticity of supply. A price rise will cause: 1. Immediately after an increase in price the quantity offered for sale will not change. Price elasticity of supply (PES) will be essentially perfectly inelastic (no increase in the supply of the goods). This is because suppliers are unable to increase supply immediately. This time period is known as the market period. 2. In the short term, suppliers will increase the resources allocated to their existing production capital, in the form of additional workers and raw material, causing a rise in quantity supplied. The producers are using the plant/equipment more efficiently. This time period is known as the short run. 2. In the long term suppliers will add to their existing production capital by increasing the size and number of factories, production lines, and other fixed methods of production. As these processes increase, the ability of suppliers to increase significantly the quantity supplied in response to price increases. Price elasticity of supply will become increasingly elastic. This time period is known as the long run. EXCESS (SPARE) CAPACITY: Excess capacity is a sitution where the resources used by a firm are not being used to the greatest level of efficiency. If this is the case, price elasticity of supply for that firm will be relatively elastic, as any increase in price can be met with increased production by using those resources more efficiently. LEVEL OF INVENTORIES: Some firms have the ability to store excess stock/inventory. The ability to hold this stock significantly affects the price elasticity of supply (PES) for that firm. For example, if the firm has a significant ability to hold over stock, the firm can significantly increase the amount of stock they offer for sale if prices increases. This represents a greatly elastic price elasticity of supply (PES). However, if a firm is unable to hold over stock, they cannot increase the Creative Classroom 169

20 quantity for sale if the price increases. This represents a greatly inelastic price elasticity of supply (PES). It should be noted that the type of good greatly affects storage for example, cars are often significantly dated, and its model and year greatly affects its selling price, thus firms aim to maintain low stock levels. On the other hand, housing materials do not significantly change, and can be stored for significant lengths of time easily. A STORY -THE FACTORS CAUSING AN ELASTIC SUPPLY: STORY: The elastic band business - Factors causing an elastic supply: I am looking inside a factory that produces elastic bands. There is a long clock (grandfather clock) and its going tick elastic tick. There are workers asleep (idle capacity) and the building is filled to the top with elastic bands (high level of stocks). 1. Elastic Band Company = Elasticity of supply. 2. Long clocks = Long time period. Tick elastic tick = Makes the same point again, that the longer the time period, the more elastic the supply. 3. Workers asleep = Idle or excess capacity including labour and machinery. 4. Room filled with elastic bands = High levels of stocks (inventories). Story: q MARKET STRUCTURES: Overview: There are four main types of market structures. They vary in the degree of market power each firm has, and consequently the level of competition in that market. PURE COMPETITION (PERFECT COMPETITION): NUMBER OF SELLERS: Perfect Competition is a market structure where there are so many firms, and they are all so small, that they are unable to affect the price of the goods or services they provide. In effect, they are price takers, as they would not be able to sell any product above the market price, and must sell all the products at the market price. Going below the market price would simply sacrifice profit needlessly. While perfect competition is a good academic model, it is unlikely to occur in real life, as in almost all markets, firms have some level of market power. Content: 170 Creative Classroom

21 PRODUCT (HOMOGENEOUS / DIFFERENTIATED): In perfect competition, all of the products sold in the market are the same. Buyers and sellers of the product know that the products sold by all the different firms are the same, and know that the price is the same. In perfect competition, the market provides all the competition for the firms. Firms cannot differentiate their products, as they are known to be the same, and they cannot change the price of their goods, as they are price takers. BARRIERS TO ENTRY: There are no barriers to entry. MONOPOLY: NUMBER OF SELLERS: A monopoly market structure is the market structure where there is only one firm selling the product in the market. Therefore, there is no competition in the market at all, and the firm enjoys complete market power. PRODUCT (HOMOGENEOUS / DIFFERENTIATED): To ensure that the firm enjoys this monopoly power, the product being sold must have no close substitutes. Content: BARRIERS TO ENTRY: There are significant barriers to entry into the market, which effectively means that no potential competitors are able to enter the market. REASONS FOR BARRIERS TO ENTRY: 1. In many modern economies, there is a belief that some areas of the economy should not be run for profit, but instead run by the government or government-run institutions. The government legislates that only one producer exists. A good example of this is Australia Post, which is the only company licensed to carry mail in Australia. The industry is not driven by competition and the profit motive, but instead continues to offer good quality of service in this important area. 2. The firm might hold a patent for the production of the good. A good example of this is the pharmaceutical industry. New pharmaceutical medications can take decades, and many hundreds of millions of dollars, to develop, without any guarantee of success. In order to make investments in such a risky venture attractive, the government guarantees that the company will be the only vendor of that product for an extended period of time, by allowing a company to patent their drug. This means that no other company is allowed to produce that drug for a length of time. Creative Classroom 171

22 The patent effectively creating a barrier to entry for other companies, creating a monopoly for the production of that drug. SUPER PROFITS IN THE LONG TERM: As the firm enjoys monopoly power, the firm also has complete market power. This means that the firm is a price setter, or can set the price of the goods at the profit-maximizing level. This means that the firm is able to make abnormal profits. Normally, in a market, if a firm is making abnormal profits in the short term, more firms will enter the market, until firms only make normal profits. However, due to the significant barriers to entry which exist in a monopoly market structure, it is impossible for other firms to enter into the marketplace. The monopolist is able to make abnormal profits in the long term. Oligopoly: NUMBER OF SELLERS: An oligopoly is where there are only a few large firms in the market. An oligopolistic market structure, or one where the firms are in an oligopoly, is a type of imperfect competition. This means that there is some competition, unlike in a monopoly, but there is not as much competition as appears in Perfect Competition. In an oligopolistic market, the few large firms sell a differentiated products. Firms in an oligopoly usually require significant start up costs in order to compete in the market. In this market, they each control a significant market share. A good example of an Australian oligopoly is the supermarket industry, which is dominated by Woolworths and Coles. Content: PRODUCT (HOMOGENEOUS / DIFFERENTIATED): The product is differentiated. There is usually an unspoken agreement in oligopolistic markets to compete on a product basis, rather than price. For this reason, oligopolies usually produce significant amounts of advertising, in an attempt to increase market share by increasing brand loyalty. BARRIERS TO ENTRY: The reasons there are only a few firms in the market due to significant barriers to entry: As there are few firms in an oligopolistic market, each firm closely monitors the behaviour of the other firms in the market. 172 Creative Classroom

23 As each firm has significant market power, if one firm decided to undercut its rivals by decreasing its prices, it could start a price war that would significantly lower the profits of the entire market. Oligopolies are usually tolerated by governments, as long as the firms do not abuse their market power. For this reason, any new mergers in oligopoly markets are usually not allowed by the competition watchdog. Any attempt at collusion, such as a synchronised increase in prices, is closely observed by the Australian Competition and Consumer Commission. Monopolistic Competition: NUMBER OF SELLERS: Monopolistic competition is a market structure where there are many firms that all have a small level of market power. A Monopolistic Competition market structure is the other type of imperfect competition. This means that there is some competition, unlike in a monopoly, but there is not as much competition as appears in perfect competition (see later). Firms in monopolistic competition are usually limited in the amount they can expand. A good example of a monopolistic market is the restaurant industry. This means that monopolistic competition usually needs little regulation for it to remain competitive, and as such is usually encouraged by the government. Content: PRODUCT (HOMOGENEOUS / DIFFERENTIATED): While the firms sell similar products, the products are not identical; the products are differentiated. Firms will use significant levels of product differentiation, or branding, to separate their product from other products. Having a degree of separation promotes brand loyalty, which increases the market power of the firm. Firms in monopolistic competition concentrate on product differentiation and brand loyalty. As they must, to a great extent, follow the market price level, their best way to increase profit is to increase the amount of people purchasing their product. As they are able to differentiate their product, they can create a form of brand loyalty which increases their level of sales. This product differentiation, usually based on advertising, becomes one of the key factors of the businesses success. BARRIERS TO ENTRY: There are no barriers to entry. Creative Classroom 173

24 SAMPLE ESSAY q SAMPLE ESSAY: Discuss the workings of the market, including concepts of elasticity, and how governments intervene. In discussing the market economy, the economist must look at both the strengths and weaknesses of the market and its processes, as well the ways in which governments can intervene. The market system involves the interaction of supply and demand to determine price. The responsiveness of quantity demanded and supplied to price changes are, respectively, the price elasticity of demand and price elasticity of supply. Governments intervene in the market through price floors and ceilings, quantity intervention, as well as subsidies and grants. The economic problem arises because of scarcity and finite resources. That is, we do not possess enough resources to satisfy our unlimited wants. The economic problem has generated significant debate amongst economists as to what is the best solution. Solving the economic problem involves acknowledging that finite economic resources must be used efficiently. Different economic models, such as capitalism and socialism, present differing ways to address the economic problem. A solution to the economic problem can lie with producing as many goods and services as possible, and the goods and services needed the most. A laissez faire free market allows the forces of supply and demand to solve the economic problem, ensuring greater allocative efficiency as resources are directed towards highly valued goods and services. A centrally planned economy solves the economic problem through allowing the government to control and prioritise the production of certain goods and services. One of the important components of the price mechanism is demand, the specific amount of a good or service that households are prepared and able to pay for at a specific time. Individual demand is concerned with the demand of each individual person. Market demand is concerned with the collective demand of all consumers, and this is what we are going to look at. Demand interacts with supply, which will be discussed later, to determine the price of a good or service. A demand schedule refers to a table that illustrates the demand for a good or service over a price range, often in constant increments. The law of demand states that an increase in the price of a good or service will result in a decrease in demand, and vice versa. An increase in the price of a good or service means that consumers will purchase less of the product because the product is more expensive compared to alternatives and they cannot afford to purchase as much of the product. Giffen goods represent a challenge to the law of demand, as demand increases when price increases. This is often because higher priced goods are seen as indicative of wealth FOCUS: Introducing the answer. FOCUS: Simple analysis. FOCUS: Key definition. 174 Creative Classroom

25 and prestige, meaning that people want to purchase the good. Price factors play an important role in influencing demand. Price factors only deal with the price of the good or service itself. If the price of a need increases, there will likely not be a significant decrease in demand because such products are required for daily life. However, more luxurious goods will see a decrease in demand when price increases. Ceteris paribus, changes in the price of a good or service, can result in a change in the quantity demanded, most often in the opposing direction of the price change. Only changes in the price of the good or service itself can lead to a contraction or expansion in demand (that is, movements along the demand curve). Several non-price factors can also lead to movements of the demand curve. Social movements, technological developments, and trends can lead to some goods being seen as more fashionable than others, leading to an increase in demand. If there is a rise in level of incomes, perhaps due to economic growth, then there will be a subsequent increase in demand, because consumers will be more willing and able to purchase certain goods and services. If the price of an alternative good or service decreases, and the alternative product is considered a close substitute, then the demand for the alternative product will likely increase whilst the demand for the original good will decrease. If consumers expect that prices will increase in the future, then consumers will increase their current demand. If there is a rise in the proportion of young people, then there will an increase in demand for youth-related products. Similarly, a rise in the proportion of old people will see an increased demand for aged care. The quantity of products demanded will increase if the population increases. The other important component of the price mechanism is supply; the specific amount of a good or service that firms in a specific industry are prepared and able to sell at various price levels at a specific time. Individual supply is concerned with the supply of each individual firm. Market supply is concerned with the cumulative supply of all firms. Supply interacts with demand, which was discussed earlier, to determine the price of a good or service. A supply schedule refers to a table that illustrates the supply of a good or service over a price range, often in constant increments. The following discussion rests under the assumption that there is pure competition and no government intervention in the market. This means that no firm in the market, or the government, has the power to determine prices. The price mechanism involves the interaction of supply and demand to determine the market price of a particular good or service and the quantity FOCUS: Simple examples. FOCUS: Simple analysis. FOCUS: Simple examples. SAMPLE ESSAY Creative Classroom 175

26 SAMPLE ESSAY of this good or service that is produced. The concept of market equilibrium involves looking at the price mechanism, and occurs when the quantity demanded and quantity supplied of a particular product is equal. As a result, the market clears as there is no excess supply or demand, and there is no tendency for price or quantity change. This concept is similar to the price elasticity of demand. Looking at the price elasticity of demand involves looking at the degree to which a change in price can result in a change in supply. A good has relatively elastic supply when the rise in quantity supplied is proportionately greater than the increase in price. Conversely, a good is relatively inelastic if there is a less than proportionate change in quantity supplied to a change in price. A good is unit elastic if there is a proportional change in supply to a change in price. Looking at the price elasticity of demand involves looking at the degree to which a change in price can result in a change in demand. It is important that price elasticity of demand is understood properly, and should be precisely defined. The responsiveness of quantity demanded to price changes is the price elasticity of demand. Mathematically, it is expressed through the percentage change in quantity demanded divided by the percentage change in price. A good has elastic demand when there is a strong response to a change in price. A good has relatively elastic demand when the increase in quantity demanded is proportionately greater than the fall in price. Conversely, a Key good is relatively inelastic if there is a less than proportionate change in quantity demanded to a change in price. A good is unit elastic if there is a proportional change in demand to a change in price. A good has inelastic demand if there is a weak response in demand to a change in price. Economists have debated endlessly about the level of government intervention that should be allowed in an economy. Often the prices of goods and services can be too high or low, and the quantity produced can be too little or too much. This revolves around how to address the problem of market failure, as the market by itself can lead to undesirable outcomes. Market failure refers to the situation in which the free market and price mechanism only considers private costs and advantages of production, without due consideration of the social costs such as environmental destruction and health problems. For example, the market may fail to take into account the damage caused by carbon emissions, which can worsen the problem of climate change. The market may also fail to take into account factors such as noise pollution caused by aeroplanes and industry. Market failure is a reason for government intervention, and this is why the Australian government intervenes in the market. Governments can intervene FOCUS: Simple analysis. FOCUS: Key definition. FOCUS: Simple examples. 176 Creative Classroom

27 in both price and quantity factors. There can be situations where the market price for a good or service is too high or too low. For example, the cost of public transport or solar panels may be too high, whilst the cost of polluting products may be too low. Consequently, the government may intervene in the price mechanism to address over pricing or under pricing. If a good or service is too expensive, then the government can impose a price ceiling, which is a maximum price that can be charged for a particular good or service. Conversely, if a good or service is too cheap, then the government can apply a price floor, which imposes a minimum price limitation upon a good or service. There are problems associated with the disequilibrium in such price interventions. A price ceiling can lead to under-production of the good, whereas a price floor can lead to over-production of the good. Therefore, price intervention is not a flawless way of addressing market failure. Governments also resort to quantity intervention as a way of addressing market failure. The quantity of certain products may be too high or low because of market failure, and there may be a limited consideration of social costs, such as environmental destruction. The unintended social costs and benefits of production are called externalities, and are not accounted for in the price mechanism. Governments are concerned with negative externalities, such as pollution. Governments intervene through taxes on firms and legislation to decrease the quantity produced of such goods, or to encourage more beneficial, less harmful forms of production. On the other hand, goods and services with positive externalities are often not appreciated fully by the public in terms of social benefits. Examples include parks, the arts and stage productions, as well as the defence force. Such goods are called merit goods and public goods. Merit goods are goods that are not produced enough by firms because consumers do not sufficiently value these goods, and therefore they are largely unprofitable. Public goods are different. Public goods are produced entirely by the government because firms cannot restrict the benefits of such goods to those who have paid for the good. In these cases, the government intervenes, often in the form of subsidies and the direct provision of such goods. As can be seen, the market is a complex system that involves issues of demand, supply, elasticity and government intervention. Imperfections in the market warrant intervention from the government, and appropriate measures need to be taken by decision makers through legislation and government policies. FOCUS: Key definition. FOCUS: Simple analysis. FOCUS: Simple examples. SAMPLE ESSAY Creative Classroom 177

### AS Economics Unit 1: Markets and Market Failure Syllabus, Key Terms & Charts

AS Economics Unit 1: Markets and Market Failure Syllabus, Key Terms & Charts 10.1 The Economic Problem The Nature and Purpose of Economic Activity The central purpose of economic activity is the production

### Elasticity. This will always be a negative number; we take the absolute value. Larger numbers (in absolute value) mean the demand is more elastic.

Elasticity Elasticity is the term economists use to measure the responsiveness of one variable to changes in another. We can measure the responsiveness of quantity demanded to changes in price, income,

### Introduction to microeconomics

RELEVANT TO ACCA QUALIFICATION PAPER F1 / FOUNDATIONS IN ACCOUNTANCY PAPER FAB Introduction to microeconomics The new Paper F1/FAB, Accountant in Business carried over many subjects from its Paper F1 predecessor,

### Price Elasticity of Demand and Supply

Supporting Teachers: Inspiring Students Economics Revision Focus: 2004 AS Economics Elasticity of Demand and Supply tutor2u (www.tutor2u.net) is the leading free online resource for Economics, Business

### The price mechanism. Chapter. Syllabus Content. B - The market system and the competitive process 40 %

Chapter 2 The price mechanism Syllabus Content B - The market system and the competitive process 40 % The price mechanism: the demand and supply model and its applications. Page 1 2.1 A market Buyers and

### Government Intervention

Government Intervention Deadweight Loss à the loss in economic surplus due to the market being prevented from reaching the equilibrium price and quantity where marginal benefit (MB) equals marginal cost

### Chapter 3 Demand and supply

Chapter 3 emand and supply emand is the amount of a product that consumers are willing and able to purchase at any given price. It is assumed that this is effective demand, i.e. it is backed by money and

### MARKET DEMAND &SUPPLY DEMAND

MARKET Market is a place where consumers meet sellers and the trading takes place. The consumers buy products at certain price, so money is exchanged for goods and services. We distinguish types of market

### Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640, Survey of Microeconomics Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The "law of demand" states that, other

### Teaching- Learning Material

STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING VARUN MARG, DEFENCE COLONY, NEW DELHI Teaching- Learning Material (On the basis of weekly syllabus for the Month of July 2011) For Class XII PGT (Economics)

### BASIC MARKET ELEMENTS. Supply Demand Price Competition

BASIC MARKET ELEMENTS Supply Demand Price Competition Supply Supply is the quantity of goods that firms are willing to produce and sale with respect to the market price when all other conditions (like

### CHAPTER 3 ELASTICITY (DEMAND AND SUPPLY)

CHAPTER 3 ELASTICITY (DEMAND AND SUPPLY) Elasticity Elasticity is a measure of responsiveness or sensitivity of a dependant variable to a percentage change in an independent variable. Elasticity is a measure

### CCEA GCE Economics Diagram Bank AS 1: Markets and Prices

CCEA GCE Economics iagram Bank AS 1: Markets and s Contents Page Introduction 1 iagram 1: The Production Possibility Frontier (1) 2 iagram 2: The Production Possibility Frontier (2) 3 iagram 3: Movements

### Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

### Chapter 4: Elasticity. McTaggart, Findlay, Parkin: Microeconomics 2007 Pearson Education Australia

Chapter 4: Elasticity Objectives After studying this chapter, you will be able to: Define, calculate, and explain the factors that influence the price elasticity of demand Define, calculate, and explain

### Perfect Competition. Perfect competition a pure market

We now move on to study the economics of different market structures. The spectrum of competition ranges from perfectly competitive markets where there are many sellers who are price takers to a pure monopoly

### 1.2 Elasticity: Price elasticity of demand (PED)

1.2 Elasticity: Price elasticity of demand (PED) Learning Outcomes Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a, along a given

ANSWERS TO END-OF-CHAPTER QUESTIONS 24-1 No firm is completely sheltered from rivals; all firms compete for the consumer dollars. Pure monopoly, therefore, does not exist. Do you agree? Explain. How might

### The formula to measure the rice elastici coefficient is Percentage change in quantity demanded E= Percentage change in price

a CHAPTER 6: ELASTICITY, CONSUMER SURPLUS, AND PRODUCER SURPLUS Introduction Consumer responses to changes in prices, incomes, and prices of related products can be explained by the concept of elasticity.

### SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

### Demand Equilibrium price Consumer sovereignty Elasticity Shortage Surplus

Social Studies AP Economics STANDARD SKILLS and CONCEPTS VOCABULARY Standard 1: Scarcity and Economic Reasoning Students will understand that productive resources are limited; therefore, people, institutions

### PROBLEM SET#3 PART I: MULTIPLE CHOICE

1 PROBLEM SET#3 PART I: MULTIPLE CHOICE 1. In general, elasticity is a measure of a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive.

### ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG

ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG TABLE OF CONTENT I. CHAPTER 1: WHAT IS ECONOMICS II. CHAPTER 2: THE ECONOMIC PROBLEM III. CHAPTER 3: DEMAND AND SUPPLY IV. CHAPTER 4: ELASTICITY

### AP Microeconomics Chapter 4 Outline

I. Introduction A. Learning Objectives In this chapter students should learn: 1. What price elasticity of demand is and how it can be applied. 2. The usefulness of the total revenue test for price elasticity

### UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

### AP Microeconomics Chapter 12 Outline

I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

### Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 10 Theory of Demand (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 10 Theory of Demand (Contd ) In continuation to our last session on theory of demand

### Income Elasticity and Cross-price Elasticity

Supporting Teachers: Inspiring Students Economics Revision Focus: 2004 AS Economics Income Elasticity and Cross-price Elasticity tutor2u (www.tutor2u.net) is the leading free online resource for Economics,

### 1. If the price elasticity of demand for a good is.75, the demand for the good can be described as: A) normal. B) elastic. C) inferior. D) inelastic.

Chapter 20: Demand and Supply: Elasticities and Applications Extra Multiple Choice Questions for Review 1. If the price elasticity of demand for a good is.75, the demand for the good can be described as:

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

### Fundamentals of Economics. 01 June Marking Scheme

Fundamentals of Economics 01 June 2016 Marking Scheme This marking scheme has been prepared as a guide only to markers. This is not a set of model answers, or the exclusive answers to the questions, and

### The slope is calculated as the change in the vertical variable divided by the change in the horizontal variable (0.80 = 20/25).

1. A city's decision to limit smoking in public areas is an example of The invisible hand at work. The market mechanism at work. Market success. Government intervention. Governments can sometimes improve

### Perfect competition is a market structure in which a large number of firms all produce the same product.

The Four Conditions for Perfect Competition Perfect competition is a market structure in which a large number of firms all produce the same product. 1. Many Buyers and Sellers There are many participants

### 1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

### EC 480 SEMINAR 5 Revision: Costs, Revenues & Profit

EC 480 SEMINAR 5 Revision: Costs, Revenues & Profit Profit and the aims of a firm Profit is made by firms earning more from the sale of goods than the cost of producing the goods. A firm s total profit

### Test Yourself: Market Structures

Test Yourself: Market Structures To determine whether any industry is workably competitive, therefore, simply have a good graduate student write his dissertation on the industry and render a verdict. It

### Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

### 1. Supply and demand are the most important concepts in economics.

Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals

### 2007 Thomson South-Western

Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes.

### 12 MONOPOLY. Chapter. Key Concepts

Chapter 12 MONOPOLY Key Concepts Market Power Monopolies have market power, the ability to affect the market price by changing the total quantity offered for sale. A monopoly is a firm that produces a

### Ch. 6 Lecture Notes I. Price Elasticity of Demand 4. CONSIDER THIS A Bit of a Stretch

Ch. 6 Lecture Notes I. Price Elasticity of Demand A. Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not

### A2 Economics. Perfect Competition. tutor2u Supporting Teachers: Inspiring Students. Economics Revision Focus: 2004

Supporting Teachers: Inspiring Students Economics Revision Focus: 2004 A2 Economics tutor2u (www.tutor2u.net) is the leading free online resource for Economics, Business Studies, ICT and Politics. Don

### Perfect Competition. Chapter 7 Section Main Menu

Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?

### Chapter 4 - Firms and Market Structures

Chapter 4 - Firms and Market Structures 1. a) True b) True c) True d) True e) False f) True g) False h) False I) True j) False k) False l) True m) False n) False 2. b) There is a single seller who can

### 23. If demand is perfectly inelastic, changes in price leave total revenue unchanged. A) True B) False. Page 4

1. Suppose the price of gasoline increases 10% and quantity demanded in Orlando drops 5% per day. The price elasticity of demand for gasoline in Orlando is: A) price elastic. B) price inelastic. C) price

### A2 Micro Business Economics Diagrams

A2 Micro Business Economics Diagrams Advice on drawing diagrams in the exam The right size for a diagram is ½ of a side of A4 don t make them too small if needed, move onto a new side of paper rather than

### a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price elastic

Things to know about elasticity. 1. Price elasticity of demand a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price

### Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition

Chapter 7 In Between the Extremes: Imperfect Competition Learning Objectives List the five conditions that must be met for the existence of monopolistic competition. Describe the methods that firms can

### Monopoly. Monopoly. Monopoly. Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker. Chapter 15. Why Monopolies Arise

Chapter 15 While a competitive firm is a price taker, a monopoly firm is a price maker. Copyright 21 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work

### Chapter 5 Applications of Supply and Demand

1. Elasticity of Demand (E d ) Chapter 5 Applications of Supply and Demand Measures the responsiveness of Q d to a change in price. How much does Q d change (%) when P changes (%)? We can use a formula

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

### Chapter 20 Elasticity

Chapter 20 Elasticity How responsive are consumers to a change in price? Recall law of demand: As P increases, QD decreases. But how much does QD decrease? The answer to this question gives us elasticity

### Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity...

Elasticity and Its Application Chapter 5 All rights reserved. Copyright 21 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

### Monopolistic Competition

Introduction to Microeconomics Monopolistic Competition Introduction In this document we refer to imperfect competition as monopolistic competition. Monopolistic competition is described as the situation

### Elasticity! Price, Income and Cross Elasticity

Elasticity! Price, Income and Cross Elasticity Elasticity the concept l The responsiveness of one variable to changes in another l When price rises what happens to quantity demanded? Demand falls BUT!

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Exam Four - Sample Questions Chapters 12-14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the difference between perfect competition

### Exam 3 Student Name: Microeconomics Exam Dates: Week 15, late April-early May, 2007

Exam 3 Student Name: Microeconomics Exam Dates: Week 15, late April-early May, 2007 Instructions: I) On your Scantron card you must print three things: 1) Print your full name clearly; 2) Print the day

### ADVANCED SUBSIDIARY (AS) General Certificate of Education Economics Assessment Unit AS 1. assessing. Markets and Prices [AE111]

ADVANCED SUBSIDIARY (AS) General Certificate of Education 2012 Economics Assessment Unit AS 1 assessing Markets and Prices [AE111] TUESDAY 12 JUNE, AFTERNOON MARK SCHEME 7395.01 General Marking Instructions

### J. K. SHAH CLASSES. (C) True or False : (i) True (ii) True (iii) False (iv) True. Ans.2. Give Reasons/ explain the following statement:

J. K. SHAH CLASSES QUESTION PAPER Date: 25/09/2016 Total Marks: 40 Total time: 2 hour Solutions Ans.1. (A) Fill in the Blank: 1) Ragner Frisch 2) Larger 3) Equilibrium 4) Monopolistic Competition (B) Match

### Unit 5.4: Monopoly. Michael Malcolm. June 18, 2011

Unit 5.4: Monopoly Michael Malcolm June 18, 2011 1 Price Making A firm has a monopoly if it is the only seller of some good or service with no close substitutes. The key is that this firm has the power

### 4 THE MARKET FORCES OF SUPPLY AND DEMAND

4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what

### Paper 1 (SL and HL) markschemes

Paper 1 (SL and HL) markschemes Examples of markschemes for Exam practice: paper 1 in the Economics for the IB Diploma CD-ROM are provided below. Paper 1 section A: Microeconomics Chapter 2 Competitive

### Elasticity. I. What is Elasticity?

Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

### Chapter 6. Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter

ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 Briefly indicate the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications

### Practice Exam 1. 1. Economics is the study of choice under conditions of a. demand b. supply c. scarcity d. opportunity e.

Practice Exam 1 1. Economics is the study of choice under conditions of a. demand b. supply c. scarcity d. opportunity e. abundance 2. Suppose your friends take you out for dinner on your birthday and

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### Chapter 3 Market Demand, Supply, and Elasticity

Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between

### TOPIC III: ELASTICITY AS A MEASUREMENT OF DEGREE OF RESPONSE

TOPIC III: ELASTICITY AS A MEASUREMENT OF DEGREE OF RESPONSE I. Price Elasticity of Demand A. A measurement of the degree of responsiveness of quantity demanded of good X to a change in P x B. E D = measured

### CHAPTER-1 1. Whose definition of economics is classificatory? 2. Who is considered as the father of economics?

CHAPTER-1 1. Whose definition of economics is classificatory? (A)Adam Smith (B) Marshall (C) Pigou (D) Robbins 2. Who is considered as the father of economics? (A)Adam Smith (B) Marshall (C) Pigou (D)

### Chapter 13 Perfect Competition

Chapter 13 Perfect Competition 13.1 A Firm's Profit-Maximizing Choices 1) What is the difference between perfect competition and monopolistic competition? A) Perfect competition has a large number of small

### Elasticity and Its Uses

CHAPTER 4 Elasticity and Its Uses CHAPTER OVERVIEW One of the most practical uses of economic analysis is to predict the effects of changes in underlying conditions or policies on the prices and production

### ELASTICITY AND ITS APPLICATION

5 ELASTICITY AND ITS APPLICATION CHAPTER OUTLINE: I. The Elasticity of Demand A. Definition of elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

### Midterm Exam #2. ECON 101, Section 2 summer 2004 Ying Gao. 1. Print your name and student ID number at the top of this cover sheet.

NAME: STUDENT ID: Midterm Exam #2 ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your

### Monopolistic Competition

In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what

### CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates

### Price Theory Lecture 2: Supply & Demand

Price Theory Lecture 2: Supply & emand I. The Basic Notion of Supply & emand Supply-and-demand is a model for understanding the determination of the price of quantity of a good sold on the market. The

### Chapter 6 Elasticity

Goldwasser AP Microeconomics Chapter 6 Elasticity BEFORE YOU READ THE CHAPTER Summary This chapter develops the concept of elasticity, which provides a numerical measure of the responsiveness of quantity

### SAMPLE COURSE OUTLINE ECONOMICS ATAR YEAR 11

SAMPLE COURSE OUTLINE ECONOMICS ATAR YEAR 11 Copyright School Curriculum and Standards Authority, 2014 This document apart from any third party copyright material contained in it may be freely copied,

### BPE_MIC1 Microeconomics 1 Fall Semester 2011

Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 12.12.2011, 9:00-10:30 a.m. Test A Guidelines and Rules:

### BPE_MIC1 Microeconomics 1 Fall Semester 2011

Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 12.12.2011, 9:00-10:30 a.m. Test B Guidelines and Rules:

### Review Test Ch 9, 10, 11 2

Review Test Ch 9, 10, 11 2 Student: 1. A one-firm industry is known as: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure competition. 2. Which of the following is not a basic characteristic

### Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

### Pre-Test Chapter 23 ed17

Pre-Test Chapter 23 ed17 Multiple Choice Questions 1. The kinked-demand curve model of oligopoly: A. assumes a firm's rivals will ignore a price cut but match a price increase. B. embodies the possibility

### Recitation #5 Week 02/08/2009 to 02/14/2009. Chapter 6 - Elasticity

Recitation #5 Week 02/08/2009 to 02/14/2009 Chapter 6 - Elasticity 1. This problem explores the midpoint method of calculating percentages and why this method is the preferred method when calculating price

### Market Structure: Perfect Competition and Monopoly

WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

### http://ezto.mhecloud.mcgraw-hill.com/hm.tpx

Page 1 of 17 1. Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from \$12 to \$16, the number of Frisbees demanded will Decrease

### Economics 103h Fall 2012: Part 1 of review questions for final exam

Economics 103h Fall 2012: Part 1 of review questions for final exam This is the first set of review questions. The short answer/graphing go through to the end of monopolistic competition. The multiple

### CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.)

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates the

### 1 of 25 5/1/2014 4:28 PM

1 of 25 5/1/2014 4:28 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods

### Chapter 11 Perfect Competition

These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 11 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter

### I. Features of Monopolistic Competition

University of Pacific-Economics 53 Lecture Notes #15 I. Features of Monopolistic Competition Like the name suggests, a monopolistically competitive industry has features from both a monopoly market structure

### Economics Basics Tutorial

Economics Basics Tutorial http://www.investopedia.com/university/economics/ Thanks very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx

### Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

### CHAPTER 4 WORKING WITH SUPPLY AND DEMAND

CHAPTER 4 WORKING WITH SUPPLY AND DEMAND ANSWERS TO ONLINE REVIEW QUESTIONS 1. The rate of change along a demand curve measures how much one variable changes for every one-unit change in another variable.

### Microeconomics Required Graphs and Terms

Microeconomics Required Graphs and Terms Understanding and explaining the economic concepts required by the AP and IB exams rests on a solid knowledge of fundamental economic graphs and terms. In order