Questions and Answers
What is elasticity of demand?
What describes inelastic demand?
Demand that is not very sensitive to a change in price.
What describes elastic demand?
Demand that is very sensitive to a change in price.
What is total revenue?
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What does unitary elastic demand mean?
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The demand for a product becomes more elastic as more time passes.
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The demand curve for luxuries is less elastic than the demand curve for necessities.
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Why is the availability of substitutes important in determining price elasticity of demand?
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Study Notes
Elasticity of Demand
- Elasticity of demand measures consumers' responsiveness to price changes.
- Demand is classified as inelastic when price changes do not significantly affect quantity demanded, typically due to a lack of substitutes or inconvenience in changing purchasing habits. Here, price elasticity is less than 1.
- Demand is classified as elastic when quantity demanded responds significantly to price changes, commonly due to the availability of many substitutes. In this case, price elasticity is greater than 1.
- Unitary elastic demand occurs when the percentage change in quantity demanded is equal to the percentage change in price, resulting in a price elasticity of exactly 1.
Total Revenue
- Total revenue is calculated as the product of the price of goods and the quantity sold.
- Understanding elasticity is crucial for predicting how total revenue will change with price adjustments.
Factors Influencing Elasticity
- The passage of time affects demand elasticity; as time passes, demand generally becomes more elastic.
- Luxuries tend to have a more elastic demand curve compared to necessities, meaning consumers are more responsive to price changes for luxury items.
- The availability of substitutes is a critical determinant of price elasticity; more substitutes lead to greater elasticity, while fewer substitutes result in less elastic demand.
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Description
Test your knowledge of the elasticity of demand with these flashcards. This section covers key concepts like inelastic demand and consumer responsiveness to price changes. Perfect for students looking to reinforce their understanding of economic principles.
