Elasticity of Demand Overview

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Questions and Answers

What does Price Elasticity of Demand (PED) measure?

Change in demand due to change in price (correct)

Change in production costs

Change in market competition

Change in demand due to change in consumer income

Perfectly inelastic demand is represented by a PED value of 1.

False

Define the term 'elastic demand'.

Demand changes more than proportionally to price changes.

If the price of a product increases by 10% and the quantity demanded decreases by 5%, the PED is _____ (use absolute value).

0.5 Signup and view all the answers

Match the types of demand with their characteristics:

Perfectly inelastic = Quantity demanded doesn't change with price Perfectly elastic = Any increase in price drops demand to zero Inelastic = Demand changes less than proportionally to price changes Elastic = Demand changes more than proportionally to price changes Signup and view all the answers

What factors significantly affect the Price Elasticity of Demand?

Number and closeness of substitutes Signup and view all the answers

Higher-priced products tend to have more elastic demand.

True Signup and view all the answers

What happens to total revenue when inelastic demand is encountered?

Total revenue increases. Signup and view all the answers

What type of demand is likely when consumers can easily switch products due to a price increase?

Elastic demand Signup and view all the answers

The demand for petrol is generally more elastic than for butter.

False Signup and view all the answers

What is an example of a product with inelastic demand according to the provided content?

Petrol Signup and view all the answers

If a luxury car costing $100,000 increases by 10%, that results in an extra cost of __________ for the buyer.

10,000 Signup and view all the answers

Match the products with their type of demand:

Butter = Elastic demand Petrol = Inelastic demand Daily Coffee = Inelastic demand Luxury Cars = Elastic demand Signup and view all the answers

What causes demand to become more elastic?

Presence of close substitutes Signup and view all the answers

A product that constitutes a small part of a consumer's budget usually results in more elastic demand.

False Signup and view all the answers

What happens to the demand for products like daily coffee when their prices increase?

Demand tends to be relatively inelastic. Signup and view all the answers

Study Notes

Elasticity of Demand

Elasticity measures how much one variable changes in response to a change in another. It shows responsiveness.
In demand, elasticity shows how sensitive demand for a product is to changes in its determinants, like price or income.
Economists examine two main types:
- Price Elasticity of Demand (PED)
- Income Elasticity of Demand (YED)

Price Elasticity of Demand (PED)

Definition: Measures how much the quantity demanded of a product changes when its price changes.
Formula: PED = (percentage change in quantity demanded) / (percentage change in price)
Example: If a price drops 10% and demand increases 15%, PED is -1.5 (usually reported as 1.5 to show the magnitude).
Ranges:
- Perfectly Inelastic Demand (PED = 0): Quantity demanded doesn't change with price changes.
- Perfectly Elastic Demand (PED = ∞): Any price increase results in demand dropping to zero.
- Inelastic Demand (0 < PED < 1): Demand changes less than proportionally to price changes.
- Elastic Demand (PED > 1): Demand changes more than proportionally to price changes.
- Unit Elastic Demand (PED = 1): Demand changes exactly in proportion to price changes.

Determinants of PED

Substitutes: Availability of close substitutes affects price elasticity greatly. If consumers can easily switch to a different product, demand is more elastic. Conversely, few substitutes result in inelastic demand.
Price: Higher-priced products tend to have more elastic demand, while lower-priced products tend to have inelastic demand. Consumers tend to be more sensitive with higher priced products
Proportion of Income: If a product takes a large portion of income, consumers are more sensitive to price changes, making demand more elastic. Conversely, small part of income leads to inelastic demand.

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Description

This quiz covers the concept of elasticity in demand, focusing on how changes in price and income affect the quantity demanded. You'll explore key definitions, formulas, and the ranges of price elasticity of demand (PED), from perfectly inelastic to perfectly elastic. Test your understanding of these critical economic principles.