Microeconomics – Homework #2

1. List/describe the determinants of price elasticity of demand.
Availability of substitutes – When a product’s price increases, it’s demand may decrease if there is a similar product who’s price did not increase.

Share of the consumer’s budget spend on the good – Higher price reduces quantity demand as the consumer’s budget will be too highly impacted.

Length of adjustment period – The longer the adjustment period, the longer the consumer has to adjust to the change. The consumer has more time to look for a substitute.

Elasticity estimates – Demand more elastic in long run. Consumers start to convert to other products over time.

2. Define inelastic and elastic demand; give an example of each.
Inelastic – quantity almost unaffected by change in price. Gas –gas has increased in price over 300% in the last couple years, but still are pumping just as much into their cars now as they were back then, because it is a needed product.
Elastic – Change in price has large effect on quantity demanded. Price increases, demand decreases. If a cheeseburger at McDonald’s goes from $1 to $4, demand for the product will decrease as most people will not be willing to pay that price.

3. What is the law of diminishing marginal utility? How does it apply to you?
The more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant. This applies to me while eating my favorite candy. While eating junior mints, after everyone consumed, it’s less fulfilling to eat another one after another one.

4. Explain the role time plays in demand.
People are willing to pay more for a product that gets them there faster. Paying more for a trip on a plane gets them there faster than a car.
Paying more for seedless grapes gets the products to consumable state quicker