competitive market demand elasticity of demand complements each price for a given good Economics Module 4 Notes Module 4 1 Consumers By the end of this module you should be able to 1 Explain the law of demand 2 Relate a demand curve to a demand schedule table 3 Determine market demand using tables or graphs as appropriate for a private good in a 4 Calculate in a table of values how price changes impact consumer surplus 5 Compare slope of linear demand curve and price elasticity of demand 6 Recognize how slopes of linear demand curves are related to relative price elasticity of 7 Determine when it s in a firm s best interest to raise lower prices based on the price 8 Use the income elasticity to classify goods normal inferior luxury necessity 9 Use the cross price elasticity to describe how goods are related substitutes or Module 4 3 Market demand A market demand curve is the sum of the individual quantities demanded at Market demand the total quantity demanded across all consumers in a market at 5 the household wishes to consume ve chocolate bars each month The remainder of the household income which is its total income minus the 25 it spends on chocolate is spent on other goods and services If the price decreases to 3 the household buys eight bars every month In other words the quantity demanded by the household increases Equally if the price of a chocolate bar increases the quantity demanded decreases The marginal valuation is a measure of how much the household would like one more chocolate bar marginal valuation price Module 4 4 Consumer Surplus have been willing to pay Have you ever bought something that ends up being less money than you would Consumer surplus the amount that individuals would have been willing to pay minus the amount that they actually paid Module 4 5 Price Elasticity of Demand When the price of co ee changes how much does the quantity you demand buy change Price Elasticity of Demand PED measures how responsive the quantity demanded of a good is to changes in its price Price Elasticity of Demand Change in Quantity Demanded Change in Price If a price change for a product causes a substantial change in either its supply or its demand it is considered elastic Generally it means that there are acceptable substitutes for the product Examples cookies luxury automobiles and co ee If a price change for a product doesn t lead to much if any change in its supply or demand it is considered inelastic Generally it means that the product is considered to be a necessity or a luxury item for addictive constituents Examples gasoline milk and iPhones Suppose that the price of apples falls by 6 from 1 99 a bushel to 1 87 a bushel In response grocery shoppers increase their apple purchases by 20 The elasticity of apples is thus 0 20 0 06 3 33 The demand for apples is quite elastic Elastic Inelastic If Price goes up total revenue goes down If Price goes down total revenue goes up If Price goes up total revenue goes up If Price goes down total revenue goes down Module 4 6 Degrees of Price Elasticity of Demand Elastic Inelastic Unitary PED Price Elasticity of Demand You I ll pay whatever to get it Economist Oh so your demand for this is perfectly inelastic Perfectly elastic when absolute value of PED is equal to In nity PED Relatively elastic when absolute value of PED is greater than one PED 1 Unitary elastic when absolute value of PED is equal to one PED 1 Relatively inelastic when absolute value of PED is less than one PED 1 Perfectly inelastic when absolute value of PED is equal to zero PED 0 Module 4 7 Price Elasticity of Demand and Total Revenue Total Expenditure Scenario for total revenue Business owner I want to increase my total revenue in ow should I Economist It depends do your customers really respond to your price increase my price changes Total Expenditure Total amount paid by consumers buyers Total Expenditure is the expenditure incurred by households on the purchase of a commodity Total Revenue Total amount received by producers sellers Module 4 8 Income Elasticity of Demand Income elasticity of demand measures how responsive the quantity demand for a good or service is to a change in income Income Elasticity of Demand Change in Quantity Demanded If the income elasticity is greater than 0 the good is normal If the income elasticity is greater than 0 but less than 1 the good is a Change in Income necessity If the income elasticity is greater than 1 the good is a luxury If the income elasticity is less than 0 the good is inferior Module 4 9 Cross Price Elasticity of Demand Cross Price Elasticity of Demand measures the responsiveness in the quantity demanded of one good when the price for another good changes Cross Price Elasticity of Demand for substitute goods is always positive More expensive Pepsi More Coca Cola instead Alternatively the cross elasticity of demand for complementary goods is negative More expensive hot dogs Less hot dog buns bought Cross Price Elasticity of Demand Change in Quantity Demanded of good x Change in Price of good y If the percentage change demanded is greater than the percentage change in price demand is said to be price elastic for example the price goes up by 5 but the demand falls by 10 If the percentage change in quantity demanded is less than the percentage change in price demand is said to be price inelastic for example the price goes up by 10 but the demand falls by 5