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What does elasticity in economics refer to?
Responsiveness of one variable to changes in another variable.
What type of demand occurs when a small change in price leads to a relatively large change in quantity demanded?
Perfectly inelastic demand means that quantity demanded does not change regardless of price.
True
Which of the following factors does NOT influence price elasticity of demand?
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What is the formula used to compute price elasticity of demand?
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What happens to the quantity demanded in perfectly elastic demand when the price changes?
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What does price elasticity of supply measure?
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What is an example of perfectly inelastic supply?
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Inelastic supply means suppliers can increase production easily when prices rise.
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What does elasticity in economics refer to?
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Which of the following describes elastic demand?
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What characterizes perfectly inelastic demand?
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Inelastic demand occurs when PED > 1.
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Which of the following factors influences the price elasticity of demand?
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How can price elasticity of supply be described when PES > 1?
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Calculate the price elasticity of demand (PED) for a good if the price increases from PHP 80.00 to PHP 90.50 and the quantity demanded decreases from 100 kilos to 10 kilos.
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The formula for calculating price elasticity of demand is _____ .
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Match the following types of elasticity with their descriptions:
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Study Notes
Elasticities in Economics
- Elasticity measures how one variable responds to changes in another, crucial for understanding market dynamics.
Price Elasticity of Demand (PED)
- PED quantifies the sensitivity of quantity demanded to price changes.
- Categories:
- Elastic Demand (PED > 1): Small price changes result in significant changes in quantity demanded; characterized by goods like luxury items.
- Inelastic Demand (PED < 1): Price changes cause minimal changes in quantity demanded; typical for necessities like food and gasoline.
- Unitary Elastic Demand (PED = 1): Proportional change in quantity demanded in response to price changes.
- Perfectly Elastic Demand (PED = ∞): Any price change leads to infinite demand variation.
- Perfectly Inelastic Demand (PED = 0): Quantity demanded remains constant, regardless of price variations.
Factors Influencing Price Elasticity of Demand
- Availability of substitutes: More substitutes lead to higher elasticity.
- Necessity vs. luxury: Luxuries tend to have more elastic demand.
- Proportion of income spent: Higher expenditure on a good increases its elasticity.
- Time horizon: Elasticity can change over time as consumers find alternatives.
- Brand loyalty: Strong loyalty can decrease elasticity.
- Who pays: The payer's sensitivity affects elasticity.
- Habitual consumption: Habits can lead to inelastic demand.
- Durability of the good: Durable goods may have lower elasticity.
- Addictive properties: Addictive substances tend to be inelastic.
- Advertising and marketing: Effective campaigns can influence elasticity.
Computing Price Elasticity of Demand
- Utilizes the Midpoint Formula to calculate elasticity based on price and quantity changes.
- Example scenarios include price changes for bananas, life-saving medications, sneakers, gasoline, and coffee, demonstrating varying elasticity values.
Price Elasticity of Supply (PES)
- PES gauges the responsiveness of quantity supplied to price changes.
- Categories:
- Elastic Supply (PES > 1): Suppliers can significantly increase production with rising prices.
- Inelastic Supply (PES < 1): Difficulty in increasing production despite rising prices.
- Unitary Elastic Supply (PES = 1): Equivalent percentage change in quantity supplied and price.
- Perfectly Elastic Supply (PES = ∞): Suppliers provide any quantity at a specific price; none if price drops slightly.
- Perfectly Inelastic Supply (PES = 0): Fixed quantity supplied, unaffected by price.
Factors Influencing Price Elasticity of Supply
- Time period: Longer time frames allow for more adjustment in supply.
- Availability of inputs: More available inputs can increase elasticity.
- Production capacity: Constraints can limit elasticity.
- Stock levels and inventory: Higher stock may allow for more responsive supply.
- Production lag: Time lags in production can affect supply responsiveness.
- Availability of substitutes in production: Alternatives can influence supply flexibility.
Application and Evaluation
- Elasticity analysis aids in economic decision-making and forecasts impacts on pricing strategies and revenue changes.
- Understanding elasticity leads to better evaluations of economic outcomes in different market scenarios.
Elasticities in Economics
- Elasticity measures how one variable responds to changes in another, crucial for understanding market dynamics.
Price Elasticity of Demand (PED)
- PED quantifies the sensitivity of quantity demanded to price changes.
- Categories:
- Elastic Demand (PED > 1): Small price changes result in significant changes in quantity demanded; characterized by goods like luxury items.
- Inelastic Demand (PED < 1): Price changes cause minimal changes in quantity demanded; typical for necessities like food and gasoline.
- Unitary Elastic Demand (PED = 1): Proportional change in quantity demanded in response to price changes.
- Perfectly Elastic Demand (PED = ∞): Any price change leads to infinite demand variation.
- Perfectly Inelastic Demand (PED = 0): Quantity demanded remains constant, regardless of price variations.
Factors Influencing Price Elasticity of Demand
- Availability of substitutes: More substitutes lead to higher elasticity.
- Necessity vs. luxury: Luxuries tend to have more elastic demand.
- Proportion of income spent: Higher expenditure on a good increases its elasticity.
- Time horizon: Elasticity can change over time as consumers find alternatives.
- Brand loyalty: Strong loyalty can decrease elasticity.
- Who pays: The payer's sensitivity affects elasticity.
- Habitual consumption: Habits can lead to inelastic demand.
- Durability of the good: Durable goods may have lower elasticity.
- Addictive properties: Addictive substances tend to be inelastic.
- Advertising and marketing: Effective campaigns can influence elasticity.
Computing Price Elasticity of Demand
- Utilizes the Midpoint Formula to calculate elasticity based on price and quantity changes.
- Example scenarios include price changes for bananas, life-saving medications, sneakers, gasoline, and coffee, demonstrating varying elasticity values.
Price Elasticity of Supply (PES)
- PES gauges the responsiveness of quantity supplied to price changes.
- Categories:
- Elastic Supply (PES > 1): Suppliers can significantly increase production with rising prices.
- Inelastic Supply (PES < 1): Difficulty in increasing production despite rising prices.
- Unitary Elastic Supply (PES = 1): Equivalent percentage change in quantity supplied and price.
- Perfectly Elastic Supply (PES = ∞): Suppliers provide any quantity at a specific price; none if price drops slightly.
- Perfectly Inelastic Supply (PES = 0): Fixed quantity supplied, unaffected by price.
Factors Influencing Price Elasticity of Supply
- Time period: Longer time frames allow for more adjustment in supply.
- Availability of inputs: More available inputs can increase elasticity.
- Production capacity: Constraints can limit elasticity.
- Stock levels and inventory: Higher stock may allow for more responsive supply.
- Production lag: Time lags in production can affect supply responsiveness.
- Availability of substitutes in production: Alternatives can influence supply flexibility.
Application and Evaluation
- Elasticity analysis aids in economic decision-making and forecasts impacts on pricing strategies and revenue changes.
- Understanding elasticity leads to better evaluations of economic outcomes in different market scenarios.
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Description
This quiz covers the concept of elasticity in economics, focusing on Price Elasticity of Demand (PED). You will explore the different categories of demand elasticity and the factors influencing them. Understanding these concepts is vital for analyzing market behavior and consumer choices.
