
The analysis of the assumption of ceteris paribus in establishing the
Introduction:
If e > 1, the demand is elastic
e < 1, the
e = 1, the demand is unit elastic
e → ∞, the demand is perfectly elastic
e = 0, the demand is perfectly inelastic
Total Revenue- It is the total earnings of the producer/seller by selling Q units of output each at a price of P. Functionally, it is written as:
Substitution effect or substitutes- As the price of a good/service rises, the consumers, working under the assumption of rationality, look for substitutes of this good/service yielding the same or nearly the same utility. The cheaper substitutes thus come to be a part of the consumers’ consumption basket. The demand for the good thus falls and that for the substitute rises. The demand for the goods with close substitutes like tea and coffee or coke and Pepsi is thus highly elastic.
This is also known as the cross-price elasticity of demand etc. It shows the percentage change in the quantity demanded of a good, let’s say X, as the price of its substitute Y changes. Algebraically, it is written as:
Income Effect- The increase in the price causes a fall in the real income of the consumers. Real income is the nominal income adjusted for the prices. If the same nominal income is able to purchase fewer units of a good than before due to a rise in the price, the income is said to have lost its
This is also known as the income elasticity of demand eY. It shows the percentage change in the quantity demanded of a good, let’s say X, as the income(Y) of the consumer changes. Algebraically, it is written as:
Demand for Necessities vs luxuries- A price change of the goods forming a part of the staple or basic needs basket of the consumer like groceries does not affect its demand much. The price elasticity of demand for these goods is thus relatively inelastic. The demand for luxuries like a high-end car, fine dining at an expensive restaurant, a vacation in a foreign country etc. is highly elastic. A change in the prices of such luxury goods/services thus significantly affects its demand.
Demand in the Short vs Long term- The demand is relatively inelastic in the short run while that, in the long run, is elastic. For example, the demand for diesel by a manufacturer for the production of goods is inelastic in the short run as he cannot make adjustments in the production process or equipment. In the long run, however, the manufacturer can resort to fuel-efficient production technology and employ advanced equipment if the prices of diesel continue to rise. He would substitute diesel for a more cost-effective fuel in the long run. In the long run thus, demand is more elastic.

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Chapter 19 Solutions
Economics Today: The Micro View (18th Edition)
- Allocative efficiency WITHIN the health care sector refers to What mix of nonmedical and medical goods and services should be produced in the macro-economy What mix of medical goods and services should be produced in the health economy What specific health care resources should be used to produce the chosen medical goods and services Who should receive the medical goods and services that are producedarrow_forwardProduction efficiency is most concerned with Choice of inputs in production process Quantity of outputs resulting from the production process The technological process of production All of the abovearrow_forwardChoose all of the following that are assumed to be constant while constructing the production possibilities curve Technology Precise mix of inputs Institutional arrangements like judicial protection of business contracts Outputsarrow_forward
- A point that lies OUTSIDE of the PPC can be achieved if A major technological innovation increases production efficiency A sudden influx of resources e.g., massive immigration of trained nurses Economic reform resulting in greater protection of intellectual property rights All of the above Only options 1 and 2arrow_forwardThe marginal benefit from each successive unit of medical care consumed declines BECAUSE each successive unit is more expensive to produce True Falsearrow_forwardIn the Human Capital approach, estimated monetary worth of life is MOST SENSITIVE to which key indicator Discount rate Social security payroll taxes Labour market earnings Workplace injury compensationarrow_forward
- Over the last few decades out-of-pocket costs have formed a DECLINING proportion of total consumer expenditure on medical care True Falsearrow_forwardCost benefit analyses often assumes the following about consumers EXCEPT Consumers have clear preferences among choices they are exposed to Consumers purposely choose actions that result in higher satisfaction Consumers factor in uncertainty of outcomes in their decision-making regarding net benefits and costs Consumers lack information about attributes of market goods that are necessary for ranking their choice setarrow_forwardThe TRUE relationship between MARGINAL utility and an individual’s stock of health can be best described as a scatter plot True Falsearrow_forward
- Many health economists believe that the United States spends its MARGINAL dollars on healthcare in a highly wasteful manner. This view is also known as “flat of the curve” medicine. True Falsearrow_forwardIncreasing provision of out-of-pocket cost calculators by major insurers are attempts to REDUCE price transparency for consumers True Falsearrow_forwardA price hike for medical goods/services that have an inelastic (i.e., <1) own-price elasticity of demand will tend to yield lower revenues True Falsearrow_forward
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