Questions and Answers
Price elasticity of demand measures the change in _______________ due to change in _______________.
demand; price
What is demand elastic?
Quantity demanded changes significantly as a result of a price change.
What is demand inelastic?
Quantity demanded changes a small amount as a result of a price change.
What does the price elasticity of demand measure?
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If a friend says, 'I am never going to buy another Dua Lipa remix again!' his or her price elasticity of demand for Dua Lipa remixes is ___________________.
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Salima's demand for Coca-Cola will be_________________________, while Antonia's demand will be relatively more ________________________.
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What are five determinants in influencing whether demand will be elastic or inelastic?
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What is the approximate price elasticity of demand for cereal if the price rises by 10% and quantity demanded falls by 20%?
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Does the cost of producing a good affect the good's price elasticity of demand?
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When the price increases by 20% and the quantity demanded drops by 20%, the price elasticity of demand is ______________ elastic.
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What is Nicolette's price elasticity of demand for hockey pucks if her quantity demanded increases from 100 to 150 when the price falls from $6 to $4?
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When the price of scooters drops by 5%, and the quantity demanded changes by 15%. We know that the price elasticity of demand for scooters is_________________ elastic.
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What is the price elasticity of demand for pens when the price increases from $2, with quantity demanded changing from 16 to 14?
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If the price elasticity of demand is -0.80 for aspirin, we could then say that the demand for aspirin is____________________.
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When the demand curve is perfectly horizontal, the price elasticity of demand is ___________________.
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When the demand curve is vertical, the price elasticity of demand is _____________ _.(positive, negative or zero?)
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Demand is almost always more price-elastic in the long run. T or F? Why?
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What is the responsiveness of quantity consumers buy to price changes if a business finds that demand for its good is very price elastic?
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'No matter the price, I will always buy five gallons of ice cream a week. I love ice cream!' This statement reflects a price elasticity of demand that is ________________.
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What kind of graph represents relatively price-elastic demand for a good?
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What kind of graphs depict a price elasticity of demand of -0.2?
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Study Notes
Price Elasticity of Demand
- Price elasticity of demand quantifies how demand changes in response to price changes.
- Elastic demand indicates significant changes in quantity demanded with price variation; consumers are sensitive to price changes.
- Inelastic demand results in minimal changes in quantity demanded despite price fluctuations; consumers are less responsive.
Determinants of Demand Elasticity
- Demand elasticity is influenced by:
- Availability of substitutes.
- Proportion of budget spent on the good.
- Classification of the good as a necessity or luxury.
- Definition of the market scope (broad vs. narrow).
- Time frame for adjustment to price change.
Elasticity Calculations
- Price elasticity formula: Percentage change in quantity demanded divided by percentage change in price.
- Example: If cereal price rises by 10% and quantity demanded falls by 20%, elasticity is -2 (elastic).
- Unitary elasticity occurs when a price increase of 20% results in a 20% drop in quantity demanded (elasticity of -1).
- Use of the midpoint method for accuracy in elasticity estimation, demonstrated with hockey pucks and pens.
Characteristics of Elasticity
- A perfectly elastic demand curve appears horizontal; any price change results in infinite quantity demanded changes.
- A perfectly inelastic demand curve is vertical; quantity demanded remains constant regardless of price.
- Long-term elasticity tends to be greater than short-term, as more alternatives and adjustments become available.
Practical Implications
- If a product has a very elastic demand, substantial changes in demand will occur with price fluctuations.
- For instances of perfect inelasticity, such as a consumer committed to buying a specific amount regardless of price, demand remains unchanged.
- Demand graphs help visualize elasticity: flatter curves indicate more elastic demand, while steep curves suggest inelastic demand.
Specific Examples
- Aspirin's price elasticity of demand calculated at -0.80 indicates inelastic demand, signifying minimal response to price changes.
- Statement examples like a consumer dedicated to buy ice cream weekly illustrate perfectly inelastic demand.
- Cereal price inquiry shows elastic characteristics if elasticity is calculated at -2.
Summary
- Understanding price elasticity of demand is crucial for businesses to predict consumer behavior in response to price alterations.
- Effective pricing strategies can be informed by the elasticity characteristics of goods, optimizing revenue and sales outcomes.
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Description
Test your knowledge on Price Elasticity of Demand with these flashcards from Chapter 4 of your Economics textbook. Understand how demand responds to price changes and the concepts of elastic and inelastic demand.
