Determinants of Demand
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Determinants of Demand

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Questions and Answers

How does the proportion of income affect price elasticity of demand?

  • Income has no effect on price elasticity.
  • Lower proportions of income make demand more elastic.
  • Higher proportions of income lead to inelastic demand.
  • Higher proportions of income lead to more elastic demand. (correct)

    • What generally happens to the demand for luxury goods when their prices increase?

  • Demand becomes more inelastic.
  • Demand decreases significantly. (correct)
  • Demand remains unchanged.
  • Demand increases as consumers seek alternatives.

    • Why is the demand for necessities considered more inelastic?

  • Consumers cannot stop using necessities even if prices rise. (correct)
  • The demand for necessities is always extremely low.
  • Consumers find substitutes easily for necessities.
  • Necessities have a high percentage of income allocation.

    • What effect does addiction have on the price elasticity of demand?

    <p>Demand for addictive goods is usually price inelastic.</p> Signup and view all the answers

    How does the time period affect demand elasticity?

    <p>Demand tends to become more elastic over time.</p> Signup and view all the answers

    Which of the following factors usually leads to more price elastic demand?

    <p>Good is considered a luxury.</p> Signup and view all the answers

    What is a characteristic of price inelastic demand?

    <p>A price increase has a minimal effect on quantity demanded.</p> Signup and view all the answers

    When considering income effects on price elasticity, which statement is true?

    <p>A significant income percentage spent on goods increases elasticity.</p> Signup and view all the answers

    How does an increase in the price of a substitute good affect the demand for the original product?

    <p>The demand for the original product increases</p> Signup and view all the answers

    What happens to the demand for complementary goods when the price of one of the goods rises?

    <p>Demand for complementary goods decreases</p> Signup and view all the answers

    Which type of good experiences an increase in demand when consumer income rises?

    <p>Normal goods</p> Signup and view all the answers

    How do changes in consumer tastes and fashions impact demand?

    <p>Demand increases for fashionable products and decreases for outdated ones</p> Signup and view all the answers

    When consumer income increases, which of the following goods would likely see a decrease in demand?

    <p>Used cars</p> Signup and view all the answers

    Which factor directly influences the quantity of a product purchased by consumers?

    <p>Price of goods</p> Signup and view all the answers

    What type of goods are affected in the same direction as a price change of substitute goods?

    <p>Substitute goods</p> Signup and view all the answers

    If the demand for a product decreases as its price decreases, what type of good is it classified as?

    <p>Inferior good</p> Signup and view all the answers

    What characterizes unit elastic demand?

    <p>Quantity demanded falls by the same percentage as the price increase.</p> Signup and view all the answers

    What shape does the curve representing unit elasticity take?

    <p>A rectangular hyperbola.</p> Signup and view all the answers

    What happens to total revenue when there is elastic demand?

    <p>Total revenue increases with a price decrease.</p> Signup and view all the answers

    How does inelastic demand affect total revenue when price changes?

    <p>Total revenue increases when price increases.</p> Signup and view all the answers

    What does a price elasticity of demand (PED) value of zero indicate?

    <p>Quantity demanded remains constant regardless of price changes.</p> Signup and view all the answers

    In the context of total revenue and elastic demand, what is the PED value typically greater than?

    <p>1</p> Signup and view all the answers

    In which scenario is perfectly elastic demand likely to occur?

    <p>Commodities with many substitutes.</p> Signup and view all the answers

    For unitary demand, what is the relationship between price changes and total revenue?

    <p>Total revenue remains constant regardless of price changes.</p> Signup and view all the answers

    If the price of a magazine decreases from $5.00 to $4.50 and the quantity demanded increases from 200,000 to 230,000, what does this reflect?

    <p>A positive price elasticity of demand.</p> Signup and view all the answers

    What is the PED value for a good with elastic demand?

    <p>-2.5</p> Signup and view all the answers

    Which of the following statements best describes perfectly inelastic demand?

    <p>Price changes result in no change in quantity demanded.</p> Signup and view all the answers

    What type of demand does a PED value of -0.5 indicate?

    <p>Inelastic demand.</p> Signup and view all the answers

    What occurs at a price where demand is perfectly elastic?

    <p>Consumers will buy zero units if there is any price increase.</p> Signup and view all the answers

    Which of the following scenarios would likely exhibit perfectly inelastic demand?

    <p>Prescription medications for severe health conditions.</p> Signup and view all the answers

    Which of the following best describes a PED value of infinity?

    <p>Even a slight increase in price results in a complete drop in demand.</p> Signup and view all the answers

    What type of demand is characterized as completely unresponsive to price changes?

    <p>Perfectly inelastic demand.</p> Signup and view all the answers

    In the immediate time period, what is the nature of supply when firms cannot increase it regardless of price changes?

    <p>Perfectly inelastic supply</p> Signup and view all the answers

    What happens to the quantity supplied when the price falls below P1 in a perfectly elastic supply scenario?

    <p>Quantity supplied becomes zero</p> Signup and view all the answers

    What range of values corresponds to inelastic supply?

    <p>PES is less than one and greater than zero</p> Signup and view all the answers

    What is the value of price elasticity of supply (PES) for perfectly elastic supply?

    <p>Infinity</p> Signup and view all the answers

    What can be concluded if the PES is infinite?

    <p>The quantity supplied can increase indefinitely with price increases.</p> Signup and view all the answers

    In the context of normal products, how is the PES typically categorized?

    <p>It can range from zero to infinity.</p> Signup and view all the answers

    What type of supply curve is represented when the PES is less than one?

    <p>Inelastic supply curve</p> Signup and view all the answers

    During the immediate time period, how can firms react to price changes?

    <p>They cannot adjust their supply at all.</p> Signup and view all the answers

    Study Notes

    Determinants of Demand

    • Internal Factors:
      • The price of a product is influenced by its production cost.
      • Higher prices generally lead to lower demand.
    • External Factors:
      • Price of Related Goods:
        • Substitute Goods are alternatives (e.g., bus vs. LRT, coffee vs. tea).
        • An increase in the price of a substitute good leads to an increase in demand for the original good, and vice versa.
        • Complementary Goods are used together (e.g., computer and disk, pen and ink).
        • An increase in the price of a complementary good leads to a decrease in demand for the original good, and vice versa.
      • Consumers' Income:
        • Increased income generally leads to increased demand for normal goods (e.g., cars, shirts, books).
        • Increased income generally leads to decreased demand for inferior goods (e.g., low-grade potatoes, used cars).
      • Consumers' Fashion Tastes and Preferences:
        • Fashion trends and preferences influence demand, leading to increases in demand for fashionable products and decreases for outdated ones.
      • Population or Number of Buyers:
        • A larger population leads to higher demand.

    Price Elasticity of Demand (PED)

    • PED measures the responsiveness of quantity demanded to changes in price.
    • The equation for calculating PED: (Percentage change in quantity demanded) / (Percentage change in price).
    • Range of PED Values:
      • Perfectly Inelastic Demand (PED = 0): Demand is unresponsive to price changes.
      • Perfectly Elastic Demand (PED = ∞): Demand is infinitely responsive to price changes.
      • Unit Elastic Demand (PED = 1): Percentage change in quantity demanded equals the percentage change in price.
      • Elastic Demand (PED > 1): Percentage change in quantity demanded is greater than the percentage change in price.
      • Inelastic Demand (PED < 1): Percentage change in quantity demanded is less than the percentage change in price.

    Total Revenue and PED

    • Elastic Demand:
      • Decreasing price increases total revenue.
      • Increasing price decreases total revenue.
    • Inelastic Demand:
      • Decreasing price decreases total revenue.
      • Increasing price increases total revenue.
    • Unitary Demand:
      • Changes in price do not affect total revenue.

    Price Elasticity of Supply (PES)

    • PES measures the responsiveness of quantity supplied to changes in price.
    • Range of PES Values:
      • Perfectly Inelastic Supply (PES = 0): Supply is unresponsive to price changes (short-run scenario).
      • Perfectly Elastic Supply (PES = ∞): Supply is infinitely responsive to price changes.
      • Inelastic Supply (PES < 1): Percentage change in quantity supplied is less than the percentage change in price.
      • Elastic Supply (PES > 1): Percentage change in quantity supplied is greater than the percentage change in price.
      • Unit Elastic Supply (PES = 1): Percentage change in quantity supplied equals the percentage change in price.

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    Chapter 2 Economics (AS Level) PDF

    Description

    Explore the various factors that influence demand for goods and services in this quiz. Understand how internal and external factors, such as the price of related goods and consumers' income, affect demand. Test your knowledge on the concepts of substitute and complementary goods, as well as normal and inferior goods.

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