Questions and Answers
What is elasticity?
What does price elasticity of demand measure?
What is inelastic demand?
Demand for a good is considered inelastic if the quantity demanded responds only slightly to changes in price.
What does it mean if demand is elastic?
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Demand for luxuries tends to be inelastic.
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Goods with close substitutes tend to have more _____ demand.
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How is the price elasticity of demand related to the slope of the demand curve?
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What occurs if demand has unit elasticity?
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Why is there no simple, universal rule for what determines a demand curve's elasticity?
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When the elasticity is greater than 1, the demand is referred to as _____ demand.
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When the elasticity is less than 1, the demand is referred to as _____ demand.
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What is meant by the term 'unit elasticity'?
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How do economists classify demand curves?
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Time horizon affects the elasticity of demand.
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The amount paid by buyers and received by sellers of a good is known as _____ revenue.
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Study Notes
Elasticity Overview
- Elasticity measures the responsiveness of buyers and sellers to changes in market conditions.
- It indicates how the quantity demanded or supplied reacts to variations in its determinants.
Consumer Response to Market Changes
- Consumers typically show greater demand response to price changes in the long run than in the short run.
- Magnitude of effects is important when evaluating event or policy impacts on markets.
Price Elasticity of Demand (PED)
- PED quantifies how demand for a good changes in response to price alterations, calculated as the percentage change in quantity demanded divided by the percentage change in price.
- PED reflects how much consumers are willing to adjust their purchase quantities in reaction to price increases.
Characteristics of Demand
- Demand is categorized as elastic when it significantly changes with price changes, indicating consumers will buy much less when prices rise.
- Demand is inelastic if quantity demanded changes little with price fluctuations, often true for necessities.
- Goods with close substitutes tend to have more elastic demand due to the ease of switching options.
Demand Determinants
- Necessities exhibit inelastic demand, while luxuries generally show elastic demand.
- Narrowly defined markets often have more elastic demand than broadly defined markets, as it is easier to find substitutes for specific goods.
- Demand elasticity can vary with the time horizon, generally becoming more elastic over longer periods.
Classifying Demand Curves
- Demand curves are classified by their elasticity:
- Elastic Demand (>1): Quantity responds more than proportionately to price changes.
- Inelastic Demand (<1): Quantity responds less than proportionately to price changes.
- Unit Elastic Demand (=1): Quantity changes proportionately equal to price changes.
Graphical Representation of Elasticity
- The slope of a demand curve relates closely to price elasticity.
- A demand curve's shape dictates its elasticity: flatter curves indicate higher elasticity, while steeper ones suggest lower elasticity.
Extreme Cases of Elasticity
- Perfectly Inelastic Demand: Represented by a vertical demand curve; the quantity demanded remains constant regardless of price changes.
- Perfectly Elastic Demand: Denoted by a horizontal demand curve; at any price above the demand curve, quantity demanded is zero, while any price on the curve allows for infinite demand.
Total Revenue and Elasticity
- Total revenue is calculated as the price of a good multiplied by the quantity sold, reflecting the income received by sellers and the money spent by buyers.
- Elasticity influences how changes in price affect total revenue, with elasticity greater than 1 typically leading to revenue loss from price increases, while elasticity less than 1 can yield revenue gains.
Summary of Elasticity Concepts
- As elasticity increases, the demand curve flattens, indicating consumers are more sensitive to price changes.
- Understanding elasticity helps predict consumer behavior and the potential impact of pricing strategies in various market contexts.
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Description
Test your knowledge on elasticity with these flashcards. This quiz covers key definitions and concepts related to elasticity in economics, helping you understand buyer and seller responsiveness in market conditions. Perfect for students of economics looking to reinforce their understanding of this important topic.
