Podcast
Questions and Answers
What makes the demand for butter relatively elastic?
What makes the demand for butter relatively elastic?
The demand for luxury cars is typically more inelastic compared to daily coffee.
The demand for luxury cars is typically more inelastic compared to daily coffee.
False
Provide an example of a product with inelastic demand.
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.
If the price of _____ increases, consumers may switch to another brand leading to more elastic demand.
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Match the product with its expected demand elasticity:
Match the product with its expected demand elasticity:
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Which of the following factors contributes to more elastic demand?
Which of the following factors contributes to more elastic demand?
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If rent prices rise significantly, it is likely that demand for housing becomes more elastic.
If rent prices rise significantly, it is likely that demand for housing becomes more elastic.
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What effect does a 10% price increase have on the demand for daily coffee?
What effect does a 10% price increase have on the demand for daily coffee?
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What does Price Elasticity of Demand (PED) measure?
What does Price Elasticity of Demand (PED) measure?
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Perfectly inelastic demand means that quantity demanded changes with price changes.
Perfectly inelastic demand means that quantity demanded changes with price changes.
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What is the formula for calculating Price Elasticity of Demand (PED)?
What is the formula for calculating Price Elasticity of Demand (PED)?
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If the Price Elasticity of Demand is greater than 1, it indicates __________ demand.
If the Price Elasticity of Demand is greater than 1, it indicates __________ demand.
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Match the type of elasticity with its description:
Match the type of elasticity with its description:
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Which of the following best describes inelastic demand?
Which of the following best describes inelastic demand?
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The availability of substitutes does not affect the Price Elasticity of Demand.
The availability of substitutes does not affect the Price Elasticity of Demand.
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What happens to total revenue when demand is elastic and the price increases?
What happens to total revenue when demand is elastic and the price increases?
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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.
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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!
