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Questions and Answers
What happens to the revenue of a business that sells elastic goods when it increases its price?
What type of goods are addictive substances, such as tobacco and sugar, classified as?
In the long run, what happens to the supply of elastic goods?
What happens to the demand for a good when a substitute product's price increases?
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What type of goods are essential goods, such as bread and milk, classified as?
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What happens to the revenue of a business that sells inelastic goods when it increases its price?
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What is the effect of a price increase on the quantity demanded of normal goods?
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Why do businesses need to understand the type of good they are selling?
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Study Notes
PED (Price Elasticity of Demand)
- Elastic: small price change leads to a large change in quantity demanded; e.g., luxury goods, non-essential goods that take up a large percentage of one's income
- Inelastic: large price change leads to a small change in quantity demanded; e.g., addictive substances, such as tobacco, drugs, and sugar
- If a business increases its price, revenue is likely to decrease for elastic goods and increase for inelastic goods
PES (Price Elasticity of Supply)
- Elastic: small price change leads to a large change in quantity supplied; e.g., long-run supply becomes more elastic as capital becomes more expandable, and time allows for adjustments
- Inelastic: large price change leads to a small change in quantity supplied; e.g., short-run supply is usually inelastic
- Offering a supplier a higher price may not significantly increase supply if the supply is inelastic
YED (Yield Elasticity of Demand)
- Businesses must understand the type of good they are selling:
- Inferior goods: increasing prices will not help sell more goods as customers cannot afford them
- Normal goods: luxury goods are income elastic (e.g., cars, electronics, fine foods), and increasing prices will not help earn more revenue
- Essential goods: income inelastic (e.g., bread, milk), and increasing prices will help earn more revenue
CPED (Cross-Price Elasticity of Demand)
- Substitutes: a change in the price of one good affects the demand for another good
- Example: an increase in the price of buses increases the demand for taxi rides
- Complements: a change in the price of one good affects the demand for another good
- Example: a decrease in the price of computers increases the demand for software
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Description
This quiz covers the concepts of elasticity in microeconomics, including elastic and inelastic demand, and how they affect a business's revenue.
