Elasticity of Demand Quiz

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Questions and Answers

What makes the demand for butter relatively elastic?

It has unique qualities

It is necessary for cooking

It takes up a large portion of income

It has many close substitutes (correct)

The demand for luxury cars is typically more inelastic compared to daily coffee.

False

Provide an example of a product with inelastic demand.

Petrol (Gasoline)

If the price of _____ increases, consumers may switch to another brand leading to more elastic demand.

Coca-Cola Signup and view all the answers

Match the product with its expected demand elasticity:

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

Which of the following factors contributes to more elastic demand?

High proportion of income spent Signup and view all the answers

If rent prices rise significantly, it is likely that demand for housing becomes more elastic.

True Signup and view all the answers

What effect does a 10% price increase have on the demand for daily coffee?

It is unlikely to change demand significantly. Signup and view all the answers

What does Price Elasticity of Demand (PED) measure?

The change in quantity demanded in response to a change in price Signup and view all the answers

Perfectly inelastic demand means that quantity demanded changes with price changes.

False Signup and view all the answers

What is the formula for calculating Price Elasticity of Demand (PED)?

Percentage change in quantity demanded / percentage change in price Signup and view all the answers

If the Price Elasticity of Demand is greater than 1, it indicates __________ demand.

elastic Signup and view all the answers

Match the type of elasticity with its description:

Perfectly Inelastic = Quantity demanded does not change with price Perfectly Elastic = Any increase in price drops demand to zero Inelastic Demand = Small decrease in demand despite a price increase Unit Elastic Demand = Proportionate change in demand with price change Signup and view all the answers

Which of the following best describes inelastic demand?

A price increase leads to a smaller proportional decrease in quantity demanded Signup and view all the answers

The availability of substitutes does not affect the Price Elasticity of Demand.

False Signup and view all the answers

What happens to total revenue when demand is elastic and the price increases?

Total revenue decreases Signup and view all the answers

Study Notes

Elasticity of Demand

Elasticity measures how responsive one variable is to changes in another.
Demand elasticity shows how sensitive demand for a product is to changes in its determinants.
Economists focus on price elasticity of demand (PED) and income elasticity of demand (YED).

Price Elasticity of Demand (PED)

Defines how much quantity demanded changes when price changes.
Formula: PED = (percentage change in quantity demanded) / (percentage change in price)
Example: If price drops 10% and demand rises 15%, PED = -1.5 (reported as 1.5).
Ranges of PED values:
- Perfectly Inelastic (PED = 0): Quantity demanded doesn't change with price.
- Perfectly Elastic (PED = ∞): Any price increase drops demand to zero.
- Inelastic (0 < PED < 1): Large price increase leads to small decrease in demand.
- Elastic (PED > 1): Small price increase leads to large decrease in demand.
- Unit Elastic (PED = 1): Demand changes exactly in proportion to price changes.

Determinants of PED

Number and Closeness of Substitutes: The availability of similar products impacts elasticity. If many substitutes exist, demand is more elastic (easily switched to an alternative). Products with few or no substitutes tend to be inelastic.
Proportion of Income Spent on the Good: Products taking up a significant portion of a person's income tend to have more elastic demand (consumers are more sensitive to price changes). Conversely, small-portion goods have inelastic demand.
Examples:
- Butter vs. Margarine: If butter prices rise, consumers switch to margarine, making butter demand relatively elastic.
- Petrol/Gasoline: Limited substitutes, relatively inelastic.
- Specific brands of soft drinks: Close substitutes, relatively elastic.
- Daily coffee: Low cost relative to income, relatively inelastic.
- Luxury cars: High cost, relatively elastic.
- Housing: Substantial budget item, can be moderately elastic.

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Description

Test your understanding of elasticity of demand, including price and income elasticity. This quiz covers the key concepts, formulas, and examples relevant to how demand reacts to pricing changes and other determinants. Challenge yourself to see how well you grasp the implications of demand elasticity!