Podcast
Questions and Answers
What can be inferred if the price elasticity of demand (PED) is greater than 1?
What can be inferred if the price elasticity of demand (PED) is greater than 1?
- Demand is unitary elastic.
- Total revenue will always increase.
- Demand is elastic. (correct)
- Demand is inelastic.
What happens to total revenue when the price of a good with inelastic demand increases?
What happens to total revenue when the price of a good with inelastic demand increases?
- Total revenue remains constant.
- Total revenue fluctuates unpredictably.
- Total revenue decreases.
- Total revenue increases. (correct)
Which of the following correctly describes unitary elastic demand?
Which of the following correctly describes unitary elastic demand?
- PED is less than 1.
- PED equals 1. (correct)
- PED is greater than 1.
- Price changes do not affect quantity demanded.
In the Midpoint Method for calculating arc elasticity, what advantage does it provide?
In the Midpoint Method for calculating arc elasticity, what advantage does it provide?
What is the formula for calculating elasticity?
What is the formula for calculating elasticity?
If the demand for a luxury good slightly decreases following a price increase, how would you classify its demand elasticity?
If the demand for a luxury good slightly decreases following a price increase, how would you classify its demand elasticity?
If a product has a PED of 0.5, what can be inferred about its demand characteristics?
If a product has a PED of 0.5, what can be inferred about its demand characteristics?
What does it indicate if the price elasticity of demand (PED) is greater than 1?
What does it indicate if the price elasticity of demand (PED) is greater than 1?
When the price of prescription medicines, known for inelastic demand, increases, what is the expected effect on quantity demanded?
When the price of prescription medicines, known for inelastic demand, increases, what is the expected effect on quantity demanded?
Which method can be used to measure price elasticity of demand?
Which method can be used to measure price elasticity of demand?
If an increase in the price of a product leads to an increase in the quantity demanded, what can be said about the elasticity?
If an increase in the price of a product leads to an increase in the quantity demanded, what can be said about the elasticity?
In the context of price elasticity, what outcome can be expected when a good is said to have elastic demand?
In the context of price elasticity, what outcome can be expected when a good is said to have elastic demand?
How is price elasticity of demand (PED) calculated using percentage changes?
How is price elasticity of demand (PED) calculated using percentage changes?
What happens when the elasticity (E) is less than 1 in absolute value?
What happens when the elasticity (E) is less than 1 in absolute value?
What does the equation % change in quantity = (QD2 – QD1) / QD1 represent?
What does the equation % change in quantity = (QD2 – QD1) / QD1 represent?
In the context of elasticity, what does it mean if E is negative?
In the context of elasticity, what does it mean if E is negative?
What characteristic defines perfectly elastic demand?
What characteristic defines perfectly elastic demand?
Which factor typically leads to more elastic demand?
Which factor typically leads to more elastic demand?
How does the time horizon affect demand elasticity?
How does the time horizon affect demand elasticity?
What type of goods typically exhibit inelastic demand?
What type of goods typically exhibit inelastic demand?
Which scenario represents a consequence of elastic demand?
Which scenario represents a consequence of elastic demand?
What role do economists play in relation to price elasticity of demand?
What role do economists play in relation to price elasticity of demand?
What can managers use the price elasticity of demand to assess?
What can managers use the price elasticity of demand to assess?
What happens to demand when there are few close substitutes available?
What happens to demand when there are few close substitutes available?
What characterizes goods with perfectly inelastic demand?
What characterizes goods with perfectly inelastic demand?
Which of the following statements is true for goods with inelastic demand?
Which of the following statements is true for goods with inelastic demand?
How is unitary elastic demand defined?
How is unitary elastic demand defined?
Which is an example of a factor affecting the price elasticity of demand?
Which is an example of a factor affecting the price elasticity of demand?
What is a typical characteristic of a product with inelastic demand?
What is a typical characteristic of a product with inelastic demand?
Which statement describes a common misconception about perfectly inelastic demand?
Which statement describes a common misconception about perfectly inelastic demand?
What is indicated by a steep demand curve?
What is indicated by a steep demand curve?
What is the effect of a 25% increase in price for goods with unit elastic demand?
What is the effect of a 25% increase in price for goods with unit elastic demand?
Which of the following best describes a good with elastic demand?
Which of the following best describes a good with elastic demand?
Why should a company carefully assess its pricing strategy for unit elastic demand goods?
Why should a company carefully assess its pricing strategy for unit elastic demand goods?
What defines goods and services with elastic demand?
What defines goods and services with elastic demand?
What is the recommended pricing strategy for goods with elastic demand?
What is the recommended pricing strategy for goods with elastic demand?
How does a 25% increase in price affect goods with elastic demand according to the example provided?
How does a 25% increase in price affect goods with elastic demand according to the example provided?
What is the characteristic of goods with perfectly elastic demand?
What is the characteristic of goods with perfectly elastic demand?
What would most likely happen if a company selling elastic goods increases prices slightly?
What would most likely happen if a company selling elastic goods increases prices slightly?
In the context of price elasticity, which scenario describes unit elastic demand?
In the context of price elasticity, which scenario describes unit elastic demand?
Flashcards are hidden until you start studying
Study Notes
Elasticity & Revenue
- Elasticity measures the responsiveness of one variable to the change in another.
- Elasticity (E) = % change in variable1 (V1) / % change in variable2 (V2)
- Positive Elasticity means an increase in variable 2 leads to an increase in variable 1.
- Negative Elasticity means an increase in variable 2 leads to a decrease in variable 1.
- If E is greater than 1, a small % change in V2 leads to a greater change in V1.
- If E is less than 1, a % change in V2 leads to a smaller change in V1.
Price Elasticity of Demand
- Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes in response to a change in price.
- PED can be calculated using Point Elasticity or Arc Elasticity (using the Midpoint Method).
- Point Elasticity = % change in quantity / % change in price.
- Arc Elasticity measures elasticity at the center of two points using the Midpoint Method (more precise).
Classifications of Price Elasticity of Demand
- Elastic Demand: PED > 1; change in price leads to more than a proportional change in quantity demanded; total revenue increases when prices decrease. Examples: luxury goods, non-essential goods (wants).
- Inelastic Demand: PED < 1; change in price leads to less than a proportional change in quantity demanded; total revenue decreases with higher prices. Examples: prescription medicine, essential goods (necessities).
- Unitary Elastic Demand: PED = 1; change in price and quantity demanded are proportional; total revenue remains constant regardless of price changes. Examples: electricity, household appliances.
Graphical Representations of Price Elasticity of Demand
- Perfectly Inelastic Demand: Elasticity = 0; quantity demanded remains the same despite price changes; does not exist in reality.
- Inelastic Demand: Elasticity < 1; quantity demand changes minimally despite a large price change; steep demand curve compared to unitary elastic or elastic demand.
- Unitary Elastic Demand: Elasticity = 1; proportionate change in quantity demanded with price change; changes in price will impact profitability.
- Elastic Demand: Elasticity > 1; larger decrease in quantity demanded with price change; decrease prices to maximize demand.
- Perfectly Elastic Demand: Elasticity = ∞; infinite demand at a fixed price; if companies maintain a fixed price, they have constant demand.
Importance of Price Elasticity of Demand
- Knowing the value of PED is useful for companies, organizations, and the government.
- PED can help determine pricing strategies, set production and sales goals to maximize profits.
What Affects Price Elasticity of Demand
- Availability of substitutes: More available substitutes make demand more elastic; fewer substitutes make demand more inelastic.
- Time horizon: Goods tend to have more elastic demand over longer time horizons because consumers have more time to adjust.
- Necessities vs Luxuries: Necessities tend to have more inelastic demand, luxuries have more elastic demand.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
