elasticity

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

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?

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?

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?

Total revenue increases significantly. Signup and view all the answers

How does the substitution effect relate to elasticity?

It increases demand for substitutes when a price increases. Signup and view all the answers

Which determinant typically leads to a more elastic demand?

Availability of close substitutes. Signup and view all the answers

What would likely occur if the price of a necessity, such as medicine, increases?

Quantity demanded does not change substantially. Signup and view all the answers

What does the price elasticity of demand measure?

The responsiveness of quantity demanded to price changes. Signup and view all the answers

How does the proportion of a product's cost in a consumer's budget affect its price elasticity?

A higher proportion generally leads to more elastic demand. Signup and view all the answers

What happens to the quantity demanded of a product in the short run when its price increases?

It changes little as consumers adjust slowly. Signup and view all the answers

In comparing the price elasticity of demand for cars and shirts, which of the following statements is true?

Price changes for cars affect budgets more than for shirts. Signup and view all the answers

What is the relationship between time and the price elasticity of demand for oil?

Long run elasticity is greater than short run elasticity. Signup and view all the answers

Which factor makes it difficult for consumers to switch to substitutes in the short run when the price of a product increases?

The necessity of changing existing systems or vehicles. Signup and view all the answers

How does an increase in oil prices typically influence its long run quantity demanded as opposed to short run quantity demanded?

Long run quantity demanded decreases even more than in the short run. Signup and view all the answers

What distinguishes elastic demand from inelastic demand?

Elastic demand is sensitive to price changes. Signup and view all the answers

Why might motorists find it difficult to reduce oil consumption immediately after a price increase?

Lack of alternative transportation options. Signup and view all the answers

What effect does an increase in the price of product A have on the purchasing power of consumers?

It decreases purchasing power for all products. Signup and view all the answers

In the context of the income effect, what is likely to happen after the price of product A increases?

Consumers will reduce their overall consumption of all products. Signup and view all the answers

Which of the following describes the substitution effect when the price of product A increases?

Consumers will seek cheaper alternatives to product A. Signup and view all the answers

How does the price change of product A impact the market for its substitutes?

Demand for substitutes increases. Signup and view all the answers

When is the real income effect considered negative?

When the price of a normal product increases. Signup and view all the answers

What happens to the quantity demanded of product A if it is a perfect substitute and its price rises?

The quantity demanded decreases to zero. Signup and view all the answers

Which of the following best illustrates elastic demand?

The quantity demanded significantly decreases with a price increase. Signup and view all the answers

If a consumer's real income decreases due to the price increase of a normal product, which action is expected?

The consumer will buy fewer normal products. Signup and view all the answers

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.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.