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Questions and Answers
What is elasticity of demand?
What is elasticity of demand?
- The average cost of goods sold
- A measure of how consumers respond to price changes (correct)
- The total amount of money a firm receives
- A type of demand that does not react to price changes
What describes inelastic demand?
What describes inelastic demand?
Demand that is not very sensitive to a change in price.
What describes elastic demand?
What describes elastic demand?
Demand that is very sensitive to a change in price.
What is total revenue?
What is total revenue?
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What does unitary elastic demand mean?
What does unitary elastic demand mean?
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The demand for a product becomes more elastic as more time passes.
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.
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?
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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