Module 8 Discussion:

Students,

Any elasticity measures the relative responsiveness of one variable to changes in

another. Let's assume that we both have the same hair stylist or barber. What would
you do if he/she raised the price of a hair cut by $10.00? Would you stay or find a new
hair stylists? If you change hair stylists, are you demonstrating "responsiveness" to a
price change? Yes or No. If you don't change hair stylists, is your response more or less
sensitive to a price change? Explain the difference between inelastic and elastic
demand.

Answer:

If the hair stylist we both receive service from raised the price of a haircut by $10.00, it
would give me incentive to find a new hair stylist. The raise in price of a haircut wat the
stimulus which, caused me to find a new hair stylist, that reaction is demonstrating
responsiveness." If I decide to remain with the hair stylist it show that I am less
responsive to price change; the answer would be no. Demand is elastic if the price
elasticity of demand is greater than 1 (Krugman & Wells page 161).

Krugman, P., Wells, Economics Third Edition. New York, NY: Worth Publishers.

Module 8 page (161)

Module 9 Discussion:

Students,

What will happen to a firm's total revenue if price increases? If you said it increases,
explain your reasoning. If you said it decreases, explain your reasoning. What do you
need to know to answer the question?

Answer:

I think that a firms total revenue would decrease if prices increase. Consumers have a
limit on what they are willing to pay. In reality, you cannot decide if a firms total
revenue will decrease if prices increase alone; you would need to know if demand is
perfectly elastic or inelastic. Demand is perfectly inelastic when the quantity demanded
does not respond at all to changes in the price. When demand is perfectly inelastic,
the demand curve is a vertical line (Krugman & Wells page 160). Demand is perfectly
elastic when any price increase will cause the quantity demanded to drop to zero. When
demand is perfectly elastic, the demand curve is a horizontal line (Krugman & Wells
page 160).

Krugman, P., Wells, Economics Third Edition. New York, NY: Worth Publishers.

Module 9 page (160)

Module 10 Discussion:

Students,

Can you think of products that do not sell well in economic downturns, or recessions?
Remember that income is a determinant of demand so income and quantity demanded
are related. Contrast those products with products whose sales do not suffer much
during a downturn.

Answer:

In economic downturns or recessions, products such as cars and house do not sell well.
Houses and cars are qualitative which, means that prices can be vary depending on the
quality and maker of the product. Demand for cars and homes are income-elastic;
when the income elasticity of
demand for that good is greater than 1 (Krugman & Wells page 169). In an economic
downturn or recession, income tends to decrease. This causes the demand for items
luxury items, such as, cars and homes to decrease. Goods that are a necessity, such as,
food and water. Food and water are income-inelastic; if the income elasticity of
demand for that good is positive but less than 1 (Krugman & Wells page 170).
Consumers need food and water irrespective of economic conditions which means it
does not cause a response in consumption of those goods.

Krugman, P., Wells, Economics Third Edition. New York, NY: Worth Publishers.

Module 10 pages (169-170)

Module 11 Discussion:

Students,

Why does water, essential for human life, have a low price while diamonds, which we
can easily live without, have a high price? How can this paradox be explained with
consumer surplus?

Answer:

Water, which is essential for human life, has a low price because there are many
venders which means the consumers have a smaller amount they are willing to pay. A
consumers willingness to pay for a good is the maximum price at which he or she
would buy that good (Krugman & Wells page 102). Although diamonds are in
abundance, they have very few venders, which means that people who supply
diamonds are in a monopoly. Diamonds are considered luxury items and diamond
suppliers are price setters. Water is a necessity and consumers are willing to pay a high
price, but there are many venders who supply waters which cause the price to be low.
This results in individual consumer surplus; the net gain to an individual buyer from
the purchase of a good. It is equal to the difference between the buyers willingness to
pay and the price paid. Water is in abundance and there are many venders and in
conjunction, causes consumer surplus is
often used to refer to both individual and to total consumer surplus (Krugman & Wells
page 104). Consumer surplus does not apply if there is no net gain.

Krugman, P., Wells, Economics Third Edition. New York, NY: Worth Publishers.
Module 11pages (102-104)