Podcast
Questions and Answers
What indicates that demand is considered elastic?
What indicates that demand is considered elastic?
- PED is less negative than -1
- PED is exactly -1
- PED is more negative than -1 (correct)
- PED is between 0 and -1
How is the midpoint method for calculating price elasticity of demand different from the traditional method?
How is the midpoint method for calculating price elasticity of demand different from the traditional method?
- It uses only the original quantity and price.
- It considers the average of the new and old quantities and prices. (correct)
- It is exclusively applicable to perfectly inelastic goods.
- It gives a higher elasticity value in all cases.
Which characteristic suggests a good has a lower price elasticity of demand?
Which characteristic suggests a good has a lower price elasticity of demand?
- It changes consumer preferences frequently
- It is a luxury item
- Availability of numerous substitutes
- It is a necessity (correct)
What effect does the steepness of a demand curve have on elasticity?
What effect does the steepness of a demand curve have on elasticity?
If the price of a good changes from €80 to €70 and the quantity demanded changes from 100 to 120, what formula best represents the arc elasticity calculation?
If the price of a good changes from €80 to €70 and the quantity demanded changes from 100 to 120, what formula best represents the arc elasticity calculation?
Which scenario would likely result in a perfectly inelastic demand?
Which scenario would likely result in a perfectly inelastic demand?
What does the term 'unit elastic' indicate about the price elasticity of demand?
What does the term 'unit elastic' indicate about the price elasticity of demand?
Why would a good with many substitutes be expected to have a higher price elasticity of demand?
Why would a good with many substitutes be expected to have a higher price elasticity of demand?
Flashcards
Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED)
The responsiveness of quantity demanded to a change in price.
Elastic Demand
Elastic Demand
A change in price significantly affects quantity demanded; PED is greater than -1.
Inelastic Demand
Inelastic Demand
A change in price has a small effect on quantity demanded; PED is between -1 and 0.
Unit Elastic Demand
Unit Elastic Demand
A change in price causes an equal percentage change in quantity demanded; PED is exactly -1.
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Perfectly Inelastic Demand
Perfectly Inelastic Demand
Quantity demanded doesn't change when price changes; PED is 0.
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Perfectly Elastic Demand
Perfectly Elastic Demand
Any price change causes quantity demanded to become zero or infinitely large; PED is infinite.
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Midpoint Method
Midpoint Method
Calculates elasticity using the average of initial and new values for price and quantity.
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Factors Affecting Elasticity
Factors Affecting Elasticity
Substitutes, tastes, luxury/necessity, and time all affect how much quantity demanded changes based on price changes.
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Elasticity
- Elasticity measures how much buyers and sellers respond to market changes.
- Price Elasticity of Demand (PED): The percentage change in quantity demanded divided by the percentage change in price.
- PED = (% change in quantity) / (% change in price)
- PED is negative, but the negative sign is often omitted.
- Elastic Demand: A change in price significantly affects quantity demanded (high PED).
- Inelastic Demand: A change in price has a less noticeable impact on the quantity demanded (low PED).
- Demand is elastic if the price elasticity is more negative than -1.
- Anything between -1 and 0 is inelastic.
- -1 is unit elastic.
- Perfectly inelastic demand: demand curve is vertical (PED = 0).
- Perfectly elastic demand: demand curve is horizontal.
Calculating PED using the Midpoint Method
- The midpoint method calculates PED by using the average of the quantity and price change.
- Arc Elasticity Formula:
- Arc Elasticity = (Y1-Y0) / (X1-X0)
- Y1 = new quantity demanded
- Y0 = original quantity demanded
- X1 = new price
- X0 = original price
- Accurate formula as it doesn't matter which direction change occurs
Factors Affecting Elasticity
- Substitutes: Goods with many substitutes tend to have higher elasticity.
- Taste: Luxury goods tend to have higher elasticity.
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