Responsiveness of demand to other factors
60 Questions
2 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does a positive income elasticity of demand indicate about a good?

  • Demand increases as income decreases.
  • Demand remains unchanged regardless of income changes.
  • Demand decreases as income increases.
  • Demand and income move in the same direction. (correct)

    • How is income elasticity of demand calculated?

  • Percentage change in quantity demanded divided by percentage change in income. (correct)
  • Percentage change in income divided by percentage change in quantity demanded.
  • Percentage change in price divided by percentage change in quantity demanded.
  • Percentage change in demand divided by percentage change in supply.

    • Which of the following goods is classified as a normal good?

  • Urban public transit
  • Used clothing
  • Medical services (correct)
  • Beans

    • A good that has a negative income elasticity of demand is classified as what?

    <p>Inferior good</p> Signup and view all the answers

    What would an increase in income typically do to the demand for most goods?

    <p>Increase demand for normal goods.</p> Signup and view all the answers

    Which of the following is an example of an inferior good?

    <p>Used clothing</p> Signup and view all the answers

    What type of goods are likely to have a positive income elasticity of demand?

    <p>Normal goods</p> Signup and view all the answers

    Which scenario illustrates cross price elasticity of demand?

    <p>The change in demand for butter when the price of margarine increases.</p> Signup and view all the answers

    What is the own-price elasticity of organic milk?

    <p>-2.00</p> Signup and view all the answers

    What does a cross-price elasticity of 0.70 for organic milk indicate?

    <p>Organic and conventional milk are substitutes.</p> Signup and view all the answers

    What does an income elasticity of 0.27 for organic milk imply?

    <p>Organic milk is a normal good.</p> Signup and view all the answers

    What is the income elasticity of conventional milk?

    <p>-0.01</p> Signup and view all the answers

    Which statement accurately describes the relationship between organic and conventional milk?

    <p>Organic milk exhibits greater price elasticity than conventional milk.</p> Signup and view all the answers

    Which group is more affluent, according to the study findings?

    <p>Purchasers of organic milk</p> Signup and view all the answers

    How does the cross-price elasticity of conventional milk compare to that of organic milk?

    <p>It is lower.</p> Signup and view all the answers

    Which statement is true regarding the elasticity measures for conventional milk?

    <p>It is price inelastic.</p> Signup and view all the answers

    What does a negative income elasticity of demand indicate about a good?

    <p>The good is inferior.</p> Signup and view all the answers

    What is the formula used to calculate the cross price elasticity of demand?

    <p>% change in quantity demanded of good A / % change in price of good B</p> Signup and view all the answers

    What does a cross price elasticity of demand of 1.0 imply about two goods?

    <p>The goods are substitutes.</p> Signup and view all the answers

    If the cross price elasticity of demand between two goods is negative, what does this indicate?

    <p>The goods are complements.</p> Signup and view all the answers

    What is the outcome when income increases but the demand for certain goods decreases?

    <p>The goods are inferior goods.</p> Signup and view all the answers

    Which of the following statements about income elasticity of demand is true?

    <p>It indicates the relationship between demand and income changes.</p> Signup and view all the answers

    Which pair of goods would have a positive cross price elasticity of demand?

    <p>Tea and biscuits.</p> Signup and view all the answers

    If the demand for a good decreases when its price increases, what does this signify about the good?

    <p>It is a normal good.</p> Signup and view all the answers

    In terms of elasticity, what is primarily concerned with how total revenue changes as price changes?

    <p>Price elasticity of demand.</p> Signup and view all the answers

    What is true about the price elasticity of demand if it has an absolute value greater than 1?

    <p>The demand is elastic.</p> Signup and view all the answers

    When evaluating two goods, if the demand for one good increases by 5% when the price of another good decreases by 10%, what is the cross price elasticity of demand?

    <p>0.5</p> Signup and view all the answers

    If a good has an income elasticity of demand of 2, how is this good classified?

    <p>Luxury good.</p> Signup and view all the answers

    What indicates that two goods are unrelated in terms of price elasticity?

    <p>Elasticity equal to 0.</p> Signup and view all the answers

    How does a shift in the demand curve relate to price elasticity?

    <p>It indicates a change in consumer preferences.</p> Signup and view all the answers

    If the income elasticity is negative and the demand for a product increases as income decreases, what kind of good is it?

    <p>Inferior.</p> Signup and view all the answers

    What does the own-price elasticity of organic milk indicate about consumer behavior?

    <p>Consumers will buy significantly more organic milk if its price decreases.</p> Signup and view all the answers

    How is conventional milk characterized in terms of income elasticity?

    <p>Conventional milk has a negative income elasticity, characterizing it as an inferior good.</p> Signup and view all the answers

    Which interpretation accurately represents the cross-price elasticity of demand between organic and conventional milk?

    <p>Both types of milk are substitutes, indicating a competitive market between them.</p> Signup and view all the answers

    What does the cross-price elasticity of 0.18 for conventional milk imply about consumer behavior?

    <p>A price increase in organic milk will lead to a small increase in conventional milk demand.</p> Signup and view all the answers

    Considering the elasticity measures, which statement about the nature of organic milk is most accurate?

    <p>Purchasers of organic milk tend to have higher disposable income compared to conventional milk customers.</p> Signup and view all the answers

    What can be inferred about consumer perception of organic milk compared to conventional milk based on elasticity estimates?

    <p>Organic milk is seen as a healthier alternative, influencing elasticity measures.</p> Signup and view all the answers

    How might variations in elasticities across different studies affect marketing strategies for milk products?

    <p>Different data sets could lead to targeted marketing for affluent consumers of organic milk.</p> Signup and view all the answers

    What does an own-price elasticity of −0.87 for conventional milk suggest?

    <p>Price changes have little impact on the demand for conventional milk.</p> Signup and view all the answers

    What does the cross-price elasticity of 0.70 for organic milk reveal about its relationship with conventional milk?

    <p>A price increase in conventional milk significantly boosts demand for organic milk.</p> Signup and view all the answers

    What characterizes a good with a positive income elasticity of demand?

    <p>The demand for the good increases as income increases.</p> Signup and view all the answers

    Which of the following goods is most likely to have a negative income elasticity of demand?

    <p>Used clothing</p> Signup and view all the answers

    In terms of income elasticity, which statement is accurate about most goods and services?

    <p>Most goods tend to have a positive income elasticity.</p> Signup and view all the answers

    What does it imply if a good has a cross price elasticity of demand that is negative?

    <p>An increase in the price of one good decreases the demand for the other.</p> Signup and view all the answers

    If demand rises as income rises, what type of good does this indicate?

    <p>Normal good</p> Signup and view all the answers

    What is a key difference between price elasticity of demand and income elasticity of demand?

    <p>Price elasticity focuses on direct changes in price, while income elasticity relates to income changes.</p> Signup and view all the answers

    If a person’s income decreases and their demand for fast food increases, what does this suggest about fast food?

    <p>It is an inferior good.</p> Signup and view all the answers

    How is income elasticity of demand calculated?

    <p>By using the percentage change in quantity demanded divided by the percentage change in income.</p> Signup and view all the answers

    Which of the following pairs of goods would likely demonstrate a positive cross price elasticity of demand?

    <p>Coffee and tea</p> Signup and view all the answers

    Which factor does NOT affect the classification of goods as substitutes or complements?

    <p>The production costs of each good.</p> Signup and view all the answers

    What does a negative cross price elasticity of demand indicate about two goods?

    <p>They are complements.</p> Signup and view all the answers

    Which of the following describes the behavior of demand when income increases for normal goods?

    <p>Demand increases.</p> Signup and view all the answers

    Which formula correctly defines income elasticity of demand?

    <p>Percentage change in quantity demanded divided by percentage change in income.</p> Signup and view all the answers

    What characterizes goods with a cross price elasticity of demand equal to zero?

    <p>They are unrelated.</p> Signup and view all the answers

    If the income elasticity of demand for a product is negative, what type of good is it typically classified as?

    <p>Inferior good.</p> Signup and view all the answers

    What is likely the relationship between local television advertising and local radio advertising based on cross price elasticity of demand?

    <p>They are substitutes.</p> Signup and view all the answers

    When calculating the cross price elasticity of demand, which two variables are primarily examined?

    <p>Quantity demanded of one good and price of a related good.</p> Signup and view all the answers

    How would an increase in the price of a good classified as a substitute typically affect the demand for that good?

    <p>Demand for the substitute increases.</p> Signup and view all the answers

    Which of the following correctly reflects the relationship between price elasticity of demand and total revenue?

    <p>Inelastic demand results in increased total revenue when price increases.</p> Signup and view all the answers

    If a good has a positive income elasticity of demand, what can be inferred about this good?

    <p>It is likely a luxury good.</p> Signup and view all the answers

    Study Notes

    Income Elasticity of Demand

    • A positive income elasticity of demand indicates that as income increases, demand for the good also increases.
    • Income elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in income.
    • A normal good is characterized by a positive income elasticity of demand, meaning demand increases as income rises.
    • A good with a negative income elasticity of demand is considered an inferior good.
    • An increase in income generally leads to an increase in demand for most goods.
    • An inferior good is a good whose demand decreases as income increases.
    • Goods with a positive income elasticity of demand are considered normal goods, indicating that demand increases as income rises.

    Cross Price Elasticity of Demand

    • Cross price elasticity of demand examines how the demand for one good changes in response to changes in the price of another good.
    • A scenario illustrating cross price elasticity of demand could be the impact of a price decrease in generic milk on the demand for organic milk.
    • A cross-price elasticity of 0.70 for organic milk indicates that a 1% increase in the price of conventional milk leads to a 0.70% increase in the demand for organic milk.
    • An income elasticity of 0.27 for organic milk signifies that a 1% increase in income leads to a 0.27% increase in demand for organic milk.

    Milk Market Analysis

    • The income elasticity of conventional milk is -0.18, implying that a 1% increase in income leads to a 0.18% decrease in demand for conventional milk.
    • The relationship between organic and conventional milk is characterized by positive cross-price elasticity, suggesting they are substitutes.
    • The group consuming organic milk appears to be more affluent based on the study findings.
    • The cross-price elasticity of conventional milk is -0.18, while that of organic milk is 0.70.
    • Conventional milk exhibits a negative income elasticity of demand, indicating that as income rises, demand for conventional milk decreases.

    Elasticity Concepts and Calculations

    • The formula for calculating cross-price elasticity of demand is: (% change in quantity demanded of good A) / (% change in price of good B).
    • A cross price elasticity of demand of 1.0 implies that goods are perfect substitutes. This means a 1% change in the price of one good leads to a 1% change in the quantity demanded of the other good.
    • A negative cross price elasticity of demand indicates that the two goods are complements, meaning an increase in the price of one good leads to a decrease in the demand for the other good.
    • When income increases but the demand for certain goods decreases, these goods are classified as inferior goods.

    Elasticity of Demand and Consumer Behavior

    • Income elasticity of demand measures how the demand for a good changes in response to changes in income, while price elasticity of demand focuses on the responsiveness of quantity demanded to price changes.
    • A pair of goods having a positive cross price elasticity of demand are substitutes.
    • When the demand for a product decreases as its price rises, this indicates that the demand for this good is relatively elastic.
    • Price elasticity of demand is primarily concerned with how total revenue changes as price changes.
    • An absolute value of price elasticity of demand greater than 1 signifies that demand is elastic, meaning a change in price leads to a proportionally larger change in quantity demanded.
    • If the demand for one good increases by 5% when the price of another good decreases by 10%, the cross-price elasticity of demand is -0.5.
    • A good with an income elasticity of demand of 2 is classified as a luxury good.
    • Two goods are considered unrelated in terms of price elasticity if their cross price elasticity of demand is zero.
    • A shift in the demand curve implies a change in the quantity demanded at every price level, while price elasticity of demand focuses on the responsiveness of quantity demanded to price changes along a given demand curve.
    • A good with a negative income elasticity of demand and an increase in demand as income decreases is an inferior good.
    • The own-price elasticity of organic milk signifies that consumers are relatively sensitive to price changes for organic milk.
    • Conventional milk is characterized as a normal good with a negative income elasticity of demand.
    • The cross-price elasticity of demand between organic and conventional milk indicates that they are substitute goods, meaning an increase in the price of one leads to an increase in the demand for the other.
    • A cross-price elasticity of 0.18 for conventional milk implies that a 1% increase in the price of organic milk leads to a 0.18% increase in the demand for conventional milk. This indicates that organic and conventional milk are substitutes, but the substitution effect is relatively weak.
    • The elasticity measures suggest that organic milk is a more price-sensitive good and a more income-sensitive good compared to conventional milk.
    • Based on the elasticity estimates, consumers perceive organic milk as a premium product compared to conventional milk.
    • Variations in elasticities across different studies may influence marketing strategies by suggesting target segments, pricing strategies, and product positioning for different milk types.
    • An own-price elasticity of -0.87 for conventional milk suggests that the demand for conventional milk is elastic, meaning a change in price leads to a proportionally larger change in quantity demanded.
    • A cross-price elasticity of 0.70 for organic milk suggests that a 1% increase in the price of conventional milk leads to a 0.70% increase in the demand for organic milk. This indicates that consumers perceive organic and conventional milk as substitutes.

    Elasticity of Demand and Goods Classification

    • A good with a positive income elasticity of demand is considered a normal good.
    • A good that exhibits a negative income elasticity of demand is likely to be an inferior good, meaning the demand for this good decreases as income rises.
    • Generally, most goods and services exhibit a positive income elasticity of demand, meaning that as income increases, the demand for these goods and services also increases.
    • A negative cross-price elasticity of demand indicates that the two goods are complements, meaning they are consumed together.
    • If demand rises as income rises, this suggests that the good is a normal good.
    • The key difference between price elasticity of demand and income elasticity of demand is that the first focuses on the responsiveness of quantity demanded to changes in price, while the second focuses on the responsiveness of quantity demanded to changes in income.
    • If a person’s income decreases and their demand for fast food increases, this suggests that fast food is an inferior good.

    Calculating Elasticities

    • Income elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in income: (% change in quantity demanded) / (% change in income).
    • Two goods that would likely demonstrate a positive cross-price elasticity of demand include organic milk and conventional milk, as they are substitutes.
    • The classification of goods as substitutes or complements is not affected by factors like brand loyalty. Instead, it is determined by the relationship between the goods and how consumers respond to price changes.
    • A negative cross-price elasticity of demand indicates that two goods are complements. This means that an increase in the price of one good leads to a decrease in the demand for the other good.
    • For normal goods, demand typically increases when income increases.
    • The correct formula for income elasticity of demand is: (Percentage change in quantity demanded) / (Percentage change in income).
    • Goods with a cross price elasticity of demand equal to zero are unrelated goods, meaning that changes in the price of one good have no effect on the demand for the other.
    • A product with a negative income elasticity of demand is typically classified as an inferior good.
    • The relationship between local television advertising and local radio advertising based on cross price elasticity is likely to be complementary, meaning that a decrease in the price of one would lead to an increase in the demand for the other.
    • When calculating the cross price elasticity of demand, the two variables primarily examined are the percentage change in the quantity demanded of one good and the percentage change in the price of another good.
    • An increase in the price of a good classified as a substitute would typically lead to an increase in the demand for the good in question.
    • The relationship between price elasticity of demand and total revenue is as follows:
      • Elastic demand: a decrease in price leads to an increase in total revenue.
      • Inelastic demand: a decrease in price leads to a decrease in total revenue.
    • If a good has a positive income elasticity of demand, it can be inferred that the good is a normal good, meaning the demand for this good increases as income rises.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz explores the concepts of income elasticity, cross-price elasticity, and overall demand dynamics for various goods. Test your understanding of normal and inferior goods, along with their elasticity characteristics. Perfect for students studying microeconomics and demand analysis.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser