Questions and Answers
Which of the following is NOT a determinant of elasticity of demand?
If many close substitutes exist, consumers are highly responsive to changes in price.
True
If few or no close substitutes exist, demand is elastic.
False
Luxury has a ______ demand.
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Necessity has a ______ demand.
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What type of demand is observed in the short run?
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What type of demand is observed in the long run?
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What is the result of a broad definition of the market on demand?
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What is the result of a narrow definition of the market on demand?
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A large percentage of income spent on a good makes consumers less sensitive to price changes.
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A small percentage of income spent on a good makes consumers highly responsive to changes in price.
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Study Notes
Determinants of Elasticity of Demand
- Availability of Close Substitutes: More substitutes lead to higher responsiveness to price changes, resulting in elastic demand.
- Luxury vs. Necessity: Luxuries exhibit elastic demand, while necessities show inelastic demand based on consumer sensitivity to price fluctuations.
- Length of Time Considered: Demand elasticity tends to be more inelastic in the short run (SR) due to fewer alternatives and adjustments; in the long run (LR), demand becomes more elastic as consumers find substitutes.
- Market Definition: A broad market definition limits available substitutes, leading to inelastic demand (e.g., food). Conversely, a narrow market definition offers many substitutes, resulting in elastic demand (e.g., specific brands).
- Proportion of Income Spent: A larger percentage of income spent on a good increases sensitivity to price changes, making demand elastic; a smaller percentage leads to inelastic demand.
Additional Insights on Demand Elasticity
- Close Substitutes: When many close substitutes exist, consumers adjust easily to price changes, demonstrating elastic demand.
- Few/No Substitutes: Lack of alternatives leads to consumers being less responsive to price changes, resulting in inelastic demand.
- Short Run Characteristics: Demand in the short run tends to be more inelastic as immediate adjustments to prices or substitutes are limited.
- Long Run Characteristics: Over time, consumers can create or find substitutes, resulting in more elastic demand.
- Income Sensitivity: Goods that take up a large portion of income make consumers more price-sensitive (elastic), while those constituting a small portion create less sensitivity (inelastic).
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Description
Explore the key factors influencing elasticity of demand in this quiz. Understand how substitutes, necessity versus luxury, time frame, market definition, and income proportion affect consumer responsiveness to price changes. Test your knowledge on this essential economic concept!
