Elasticity of Demand Quiz
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Questions and Answers

What is the simplest way to express price elasticity of demand?

  • Elasticity (correct)
  • Elasticity of Price
  • Demand Sensitivity
  • Price Sensitivity

The Percentage Method for measuring price elasticity of demand is also known as the Flux Method.

True (A)

What formula represents the Price Elasticity of Demand?

E_d = - (Percentage change in Quantity demanded) / (Percentage change in Price)

Elasticity of demand is calculated as the ratio of percentage change in quantity demanded to percentage change in _____ .

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

Match the following methods with their descriptions:

<p>Percentage Method = Measures elasticity as a ratio of percentage changes Proportionate Method = Another name for the Percentage Method Flux Method = Introduced by Prof. Marshall Elasticity = Common term for Price Elasticity of Demand</p> Signup and view all the answers

What happens to total expenditure when the price of an elastic good decreases?

<p>Total expenditure increases (D)</p> Signup and view all the answers

If the price elasticity of demand is less than one, total expenditure increases when the price decreases.

<p>False (B)</p> Signup and view all the answers

What is the relationship between price elasticity of demand and total expenditure for elastic goods?

<p>They move in opposite directions.</p> Signup and view all the answers

When the price elasticity of demand is greater than 1, demand is considered __________.

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

Match the scenarios with their outcomes:

<p>Price decreases for an elastic good = Total expenditure increases Price increases for an elastic good = Total expenditure decreases Price decreases for an inelastic good = Total expenditure decreases Price increases for an inelastic good = Total expenditure increases</p> Signup and view all the answers

What does the elasticity of demand measure?

<p>The change in price in relation to quantity demanded (C)</p> Signup and view all the answers

An increase in price will always lead to an increase in quantity demanded.

<p>False (B)</p> Signup and view all the answers

What is the formula for calculating the elasticity of demand?

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

The __________ method measures the change in quantity demanded in relation to changes in price.

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

Match the following terms with their definitions:

<p>Elasticity = Responsiveness of demand to price changes Demand = Desire for a product backed by purchasing power Price = The amount of money required to purchase a good Quantity = The amount of a product consumers are willing to buy</p> Signup and view all the answers

What happens to demand if the price of a substitute good decreases?

<p>Demand for the original good decreases (A)</p> Signup and view all the answers

Inelastic demand means that a change in price leads to a proportionately larger change in quantity demanded.

<p>False (B)</p> Signup and view all the answers

What is one factor that can affect the elasticity of demand?

<p>Availability of substitutes</p> Signup and view all the answers

Cross elasticity of demand refers to the change in demand for a commodity concerning the change in price of a substitute or complementary good.

<p>True (A)</p> Signup and view all the answers

What are the three main determinants of demand?

<p>Price, Income, Price of related goods</p> Signup and view all the answers

The percentage change in demand for a commodity with respect to the percentage change in its price is known as __________.

<p>Price Elasticity of Demand</p> Signup and view all the answers

Match the following types of elasticity with their definitions:

<p>Price Elasticity of Demand = Responsiveness of demand to changes in price Cross Elasticity of Demand = Responsiveness of demand to changes in the price of related goods Income Elasticity of Demand = Responsiveness of demand to changes in consumer income</p> Signup and view all the answers

Which type of elasticity is beyond the scope of the syllabus?

<p>Cross Elasticity of Demand (B), Income Elasticity of Demand (C)</p> Signup and view all the answers

Income elasticity of demand relates to the change in demand with respect to changes in the price of commodities.

<p>False (B)</p> Signup and view all the answers

Define cross elasticity of demand.

<p>Cross elasticity of demand refers to the change in the demand for a commodity in response to the price change of a related good.</p> Signup and view all the answers

What does 'Q' represent in the formula for price elasticity of demand?

<p>Initial Quantity demanded (D)</p> Signup and view all the answers

In the Percentage Method, absolute changes in quantity and price are considered.

<p>False (B)</p> Signup and view all the answers

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

<p>Percentage change in Quantity demanded / Percentage change in Price</p> Signup and view all the answers

The price elasticity of demand is defined as the ratio of the percentage change in quantity demanded to the percentage change in _____ .

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

A negative sign is always associated with the price elasticity of demand.

<p>True (A)</p> Signup and view all the answers

What does a price elasticity of demand value of 1.25 indicate?

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

What does a price elasticity of demand of (-) 2 indicate?

<p>A 1% decrease in price leads to a 2% increase in demand. (D)</p> Signup and view all the answers

Higher numerical values of price elasticity indicate a smaller effect of price changes on quantity demanded.

<p>False (B)</p> Signup and view all the answers

What happens to the demand for a good if its price rises, given that the price elasticity of demand is high?

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

If the price of commodity 'x' rises by 10% and the demand decreases by 20%, it is considered to be _____ elastic.

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

Which of the following describes a more elastic demand?

<p>A 10% change in price leads to a 20% change in quantity demanded. (D)</p> Signup and view all the answers

If commodity 'y' experiences a 5% rise in demand when its price increases by 10%, it is considered to be more elastic than commodity 'x' that has a 20% rise in demand.

<p>False (B)</p> Signup and view all the answers

What does price elasticity of demand quantify?

<p>The relationship between quantity demanded and price.</p> Signup and view all the answers

Match the commodities with their expected change in demand given a price increase of 10%.

<p>Commodity X = 20% increase in demand Commodity Y = 5% increase in demand Commodity Z = 10% increase in demand Commodity A = No change in demand</p> Signup and view all the answers

Flashcards

Price Elasticity of Demand

The sensitivity of demand for a good to changes in its price. Measured as the percentage change in quantity demanded divided by the percentage change in price.

Elastic Demand

When the quantity demanded of a good changes significantly in response to a price change.

Inelastic Demand

When the quantity demanded of a good changes slightly in response to a price change.

Unitary Elasticity

When the percentage change in quantity demanded is equal to the percentage change in price.

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Cross Elasticity of Demand

How responsive demand for one good is to changes in the price of another good.

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Income Elasticity of Demand

How responsive demand for a good is to changes in consumer income.

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Factors Influencing Elasticity

The responsiveness of demand to price changes can be influenced by factors like the availability of substitutes, the proportion of income spent on the good, and the time period considered.

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Importance of Elasticity in Business

Understanding price elasticity of demand is crucial for businesses because it helps them make informed decisions about pricing strategies, production levels, and marketing campaigns.

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Price Elasticity of Demand (PED)

The responsiveness of quantity demanded to changes in price. It's measured as the percentage change in quantity demanded divided by the percentage change in price.

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Percentage Method (for PED)

A method for calculating PED. It involves dividing the percentage change in quantity demanded by the percentage change in price.

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What is price elasticity of demand?

Price elasticity of demand measures how much the quantity demanded of a good changes in response to a change in its price.

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What does a price elasticity of -2 mean?

A price elasticity of demand of -2 means that a 1% decrease in price will lead to a 2% increase in demand.

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What does a higher absolute value of price elasticity mean?

The higher the absolute value of price elasticity, the greater the impact of price changes on quantity demanded.

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Why is price elasticity important for businesses?

Price elasticity helps businesses understand how changes in price will affect their sales.

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What is elastic demand?

When the quantity demanded of a good changes significantly in response to a price change, it's called elastic demand.

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What is inelastic demand?

When the quantity demanded of a good changes only slightly in response to a price change, it's called inelastic demand.

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What is cross elasticity of demand?

Cross elasticity of demand measures how responsive demand for one good is to changes in the price of another good.

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What is income elasticity of demand?

Income elasticity of demand measures how responsive demand for a good is to changes in consumer income.

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Percentage Method

A method to calculate price elasticity of demand that uses percentage changes in price and quantity demanded to calculate the elasticity value.

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Initial Quantity Demanded (Q)

The original quantity demanded of a product before a price change.

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New Quantity Demanded (Q1)

The new quantity demanded of a product after a price change.

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Initial Price (P)

The original price of a product before a change.

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New Price (P1)

The new price of a product after a change.

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Change in Price (ΔP)

The difference between the initial and new price.

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Change in Quantity Demanded (ΔQ)

The difference between the initial and new quantity demanded.

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Price Elasticity of Demand and Total Expenditure Relationship

The relationship between the price elasticity of demand for a good and the total expenditure made on that good. It describes how changes in price affect the total amount spent by consumers.

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Elastic Demand Impact on Total Expenditure

When demand is elastic, a decrease in price results in an increase in total expenditure on the good. This occurs because the increase in quantity demanded outweighs the decrease in price.

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Inelastic Demand Impact on Total Expenditure

When demand is inelastic, a decrease in price results in a decrease in total expenditure on the good. This occurs because the decrease in price is greater than the increase in quantity demanded.

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Study Notes

Elasticity of Demand

  • Demand is affected by factors like price changes, consumer income, and related good prices.
  • Elasticity measures how responsive demand is to these changes.
  • Price elasticity of demand measures the percentage change in demand for a good/service in response to a percentage change in its price.
  • Elasticity of demand can be calculated as the percentage change in quantity demanded divided by the percentage change in price.
  • A high numerical value for elasticity indicates a significant impact of price changes on quantity demanded.
  • Elastic demand means a larger change in quantity demanded for a small change in price.
  • Inelastic demand means a smaller change in quantity demanded for a large change in price.
  • Unitary elastic demand means the percentage change in quantity demanded is equal to the percentage change in price.
  • Perfectly elastic demand means an infinite amount of demand at a certain price.
  • Perfectly inelastic demand means no change in quantity demanded regardless of price changes.
  • Price elasticity of demand is affected by the nature of the good (necessity, comfort, luxury), availability of substitutes, income levels, time periods, and consumer habits.
  • Total expenditure is closely related to price elasticity of demand. If demand is elastic, a price decrease leads to increased total expenditure. If demand is inelastic, a price decrease leads to decreased total expenditure.

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Test your understanding of the elasticity of demand, focusing on how demand reacts to changes in price, consumer income, and related goods. This quiz covers various concepts including price elasticity, elastic vs. inelastic demand, and unitary elastic demand. Enhance your insights on consumer behavior and market dynamics with this engaging quiz.

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