Podcast
Questions and Answers
What does the formula for % change in quantity demanded measure?
What does the formula for % change in quantity demanded measure?
- The average increase in price over time.
- The total revenue generated from sales.
- The absolute quantity demanded before a price change.
- The relative change in quantity demanded based on price change. (correct)
Which scenario would most likely result in elastic demand?
Which scenario would most likely result in elastic demand?
- Demand remains unchanged even with significant price changes.
- A change in price has little to no effect on consumer preferences.
- A large increase in price leads to a moderate decrease in quantity demanded.
- A small increase in price leads to a large decrease in quantity demanded. (correct)
In the context of price elasticity, what does unitary elasticity imply?
In the context of price elasticity, what does unitary elasticity imply?
- Consumers are indifferent to price changes.
- The percentage change in price equals the percentage change in quantity demanded. (correct)
- Demand responds strongly to price changes.
- Total revenue decreases if price increases.
What impact does an inelastic demand have on total revenue when prices increase?
What impact does an inelastic demand have on total revenue when prices increase?
How does the substitution effect relate to elasticity?
How does the substitution effect relate to elasticity?
Which determinant typically leads to a more elastic demand?
Which determinant typically leads to a more elastic demand?
What would likely occur if the price of a necessity, such as medicine, increases?
What would likely occur if the price of a necessity, such as medicine, increases?
What does the price elasticity of demand measure?
What does the price elasticity of demand measure?
How does the proportion of a product's cost in a consumer's budget affect its price elasticity?
How does the proportion of a product's cost in a consumer's budget affect its price elasticity?
What happens to the quantity demanded of a product in the short run when its price increases?
What happens to the quantity demanded of a product in the short run when its price increases?
In comparing the price elasticity of demand for cars and shirts, which of the following statements is true?
In comparing the price elasticity of demand for cars and shirts, which of the following statements is true?
What is the relationship between time and the price elasticity of demand for oil?
What is the relationship between time and the price elasticity of demand for oil?
Which factor makes it difficult for consumers to switch to substitutes in the short run when the price of a product increases?
Which factor makes it difficult for consumers to switch to substitutes in the short run when the price of a product increases?
How does an increase in oil prices typically influence its long run quantity demanded as opposed to short run quantity demanded?
How does an increase in oil prices typically influence its long run quantity demanded as opposed to short run quantity demanded?
What distinguishes elastic demand from inelastic demand?
What distinguishes elastic demand from inelastic demand?
Why might motorists find it difficult to reduce oil consumption immediately after a price increase?
Why might motorists find it difficult to reduce oil consumption immediately after a price increase?
What effect does an increase in the price of product A have on the purchasing power of consumers?
What effect does an increase in the price of product A have on the purchasing power of consumers?
In the context of the income effect, what is likely to happen after the price of product A increases?
In the context of the income effect, what is likely to happen after the price of product A increases?
Which of the following describes the substitution effect when the price of product A increases?
Which of the following describes the substitution effect when the price of product A increases?
How does the price change of product A impact the market for its substitutes?
How does the price change of product A impact the market for its substitutes?
When is the real income effect considered negative?
When is the real income effect considered negative?
What happens to the quantity demanded of product A if it is a perfect substitute and its price rises?
What happens to the quantity demanded of product A if it is a perfect substitute and its price rises?
Which of the following best illustrates elastic demand?
Which of the following best illustrates elastic demand?
If a consumer's real income decreases due to the price increase of a normal product, which action is expected?
If a consumer's real income decreases due to the price increase of a normal product, which action is expected?
Flashcards
Income Effect
Income Effect
The change in quantity demanded due to a change in purchasing power.
Price Elasticity of Demand
Price Elasticity of Demand
Measures how responsive demand is to price changes.
Time and Demand
Time and Demand
Short-term demand is less responsive to price than long-term demand for products with substitutes.
Substitution Effect
Substitution Effect
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Real Income Effect
Real Income Effect
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Price Elasticity Formula
Price Elasticity Formula
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Higher Price Elasticity
Higher Price Elasticity
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Substitutable Products
Substitutable Products
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Short-run Elasticity
Short-run Elasticity
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Long-run Elasticity
Long-run Elasticity
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Limited Substitutes
Limited Substitutes
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Significant Budget Portion
Significant Budget Portion
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Budget Impact
Budget Impact
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Quantity Demanded
Quantity Demanded
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Elastic Demand
Elastic Demand
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Inelastic Demand
Inelastic Demand
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Price Increase Impact
Price Increase Impact
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Product Substitution
Product Substitution
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Study Notes
Income Effect on Demand
- The change in price of a product affects consumer budgets, and the response of quantity demanded is proportional to how much the product makes up of the budget.
- Cars, for example, are a significant portion of many budgets.
- A 1% increase in the price of cars will have a larger impact on consumer budgets than a 1% increase in the price of a shirt
- Consumers are likely to reduce the quantity of cars purchased more significantly than the quantity of shirts.
- Price elasticity of demand is higher for products that make up a larger percentage of consumer budgets.
Time Elapsed and Demand for a Product
- Products that have substitutes may see a smaller change in demand in the short term.
- Switching to a substitute can be difficult and time-consuming.
- When oil prices increased in the 1970s, demand for oil remained relatively stable in the short term.
- It takes time for consumers to transition to smaller cars or public transportation.
- Long-term price elasticity of demand is higher than short-term price elasticity.
Impact of Price Increase on Consumers
- When the price of a product increases, the purchasing power of consumers decreases.
- If the price of all products increases by the same percentage, due to inflation for example, the real income of consumers will decrease.
- Consumers may reduce their consumption of all products to maintain their budgets.
- This is the real income effect: the decrease in quantity demanded for a product due to a reduction in real income as a result of a product price increase.
Understanding the Substitution Effect
- When the price of a product increases, consumers may choose to substitute it with cheaper substitutes as it becomes relatively more expensive.
- The extent of substitution depends on the availability and price of substitutes.
- If a completely substitutable product exists (e.g., product B for product A), consumers may switch entirely, resulting in a decrease in demand for product A.
Calculating Price Elasticity of Demand
- Price elasticity of demand measures the responsiveness of the quantity demanded to price changes.
- It can be calculated using the formula:
- % Change in Quantity Demanded / % Change in Price
- Example: If a 13.3% increase in price leads to a 40% decrease in quantity demanded, the price elasticity of demand is 3.
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