Podcast
Questions and Answers
What does a Price Elasticity of Demand (PED) of less than 1 indicate about consumer behavior?
What does a Price Elasticity of Demand (PED) of less than 1 indicate about consumer behavior?
- Demand is perfectly elastic, consumers only buy at one price.
- Demand is elastic, consumers react a lot to price changes.
- Demand is unit elastic, proportional change occurs.
- Demand is inelastic, consumers react little to price changes. (correct)
Which factor would likely lead to a higher Price Elasticity of Demand?
Which factor would likely lead to a higher Price Elasticity of Demand?
- The good is a necessity.
- There are many close substitutes available. (correct)
- The good has a broad categorization.
- The good is purchased infrequently.
If a product is considered a luxury good, how does it usually respond to price changes?
If a product is considered a luxury good, how does it usually respond to price changes?
- It consists of necessities for consumers.
- It tends to have elastic demand. (correct)
- It tends to have inelastic demand.
- It remains unaffected by price increases.
In which scenario would demand for a good most likely be inelastic?
In which scenario would demand for a good most likely be inelastic?
If the price of a specific brand of shoes increases and the quantity demanded for that brand drops significantly, what type of elasticity does this reflect?
If the price of a specific brand of shoes increases and the quantity demanded for that brand drops significantly, what type of elasticity does this reflect?
How does the time horizon influence Price Elasticity of Demand?
How does the time horizon influence Price Elasticity of Demand?
What is the implication of a Price Elasticity of Demand (PED) that equals infinity?
What is the implication of a Price Elasticity of Demand (PED) that equals infinity?
When demand is unit elastic, what does this imply about the quantity demanded in relation to price changes?
When demand is unit elastic, what does this imply about the quantity demanded in relation to price changes?
What is the main purpose of using the midpoint method when calculating percent change?
What is the main purpose of using the midpoint method when calculating percent change?
If the price of a good increases by 20% and the quantity demanded decreases by 15%, what can be concluded about the price elasticity of demand?
If the price of a good increases by 20% and the quantity demanded decreases by 15%, what can be concluded about the price elasticity of demand?
Which elasticity type is indicated by a vertical graph line?
Which elasticity type is indicated by a vertical graph line?
In the context of price elasticity of supply, what factor typically results in elastic supply over time?
In the context of price elasticity of supply, what factor typically results in elastic supply over time?
If a store raises the price of a product and total revenue decreases, what can be inferred about the demand for that product?
If a store raises the price of a product and total revenue decreases, what can be inferred about the demand for that product?
What is the outcome when the price of a normal good decreases?
What is the outcome when the price of a normal good decreases?
In the case of price ceilings, what potential negative outcome can occur?
In the case of price ceilings, what potential negative outcome can occur?
What sign indicates that two goods are substitutes in cross-price elasticity?
What sign indicates that two goods are substitutes in cross-price elasticity?
If a firm observes that the supply of its product is relatively unresponsive to price changes in the short run, what can be said about its supply elasticity?
If a firm observes that the supply of its product is relatively unresponsive to price changes in the short run, what can be said about its supply elasticity?
What effect does an increase in an inelastic good's price generally have on total revenue?
What effect does an increase in an inelastic good's price generally have on total revenue?
Flashcards
Elasticity
Elasticity
Measures the change in quantity demanded or supplied due to price or income changes.
Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED)
Quantifies the change in quantity demanded as price changes.
PED > 1
PED > 1
Indicates demand is elastic; consumers react significantly to price changes.
PED < 1
PED < 1
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Substitutes
Substitutes
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Narrow vs. Broad Goods
Narrow vs. Broad Goods
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Luxury vs. Necessity
Luxury vs. Necessity
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Time Horizon
Time Horizon
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Percent Change (Midpoint Method)
Percent Change (Midpoint Method)
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Inelastic Demand
Inelastic Demand
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Elastic Demand
Elastic Demand
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Perfectly Inelastic Demand
Perfectly Inelastic Demand
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Perfectly Elastic Demand
Perfectly Elastic Demand
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Price Elasticity of Supply (PES)
Price Elasticity of Supply (PES)
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Income Elasticity of Demand (YED)
Income Elasticity of Demand (YED)
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Cross-Price Elasticity of Demand (XED)
Cross-Price Elasticity of Demand (XED)
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Total Revenue (TR)
Total Revenue (TR)
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Study Notes
Elasticity Overview
- Elasticity quantifies how responsive quantity demanded or supplied is to changes in price or income.
- Understanding elasticity is crucial for businesses and governments in reacting to market shifts.
Price Elasticity of Demand (PED)
- PED measures the responsiveness of quantity demanded to price changes.
- Formula: PED = (% change in quantity demanded) / (% change in price)
- PED > 1: Elastic demand – consumers are highly responsive to price changes.
- PED < 1: Inelastic demand – consumers are less responsive to price changes.
- PED = 1: Unit elastic demand – proportional change in quantity demanded to price.
- PED = 0: Perfectly inelastic demand – no change in quantity demanded regardless of price.
- PED = ∞: Perfectly elastic demand – consumers buy only at a specific price.
Price Sensitivity & Determinants of PED
- Availability of substitutes: Many substitutes = elastic demand; few substitutes = inelastic demand.
- Narrow vs. broadly defined goods: Specific goods = elastic; broad categories = inelastic.
- Luxury vs. necessity: Luxuries = elastic demand; necessities = inelastic demand.
- Time horizon: Short-run = inelastic; Long-run = elastic - consumers have more time to adjust to price changes.
How to Calculate Percent Change (Midpoint Method)
- Midpoint formula avoids bias in percentage change calculations:
- %ΔQ = [(Q2 - Q1) / ((Q1 + Q2)/2)] * 100
- %ΔP = [(P2 - P1) / ((P1 + P2)/2)] * 100
- These values are then used in the PED formula.
Graphs of Elasticity
- Perfectly Inelastic: Vertical line - Demand remains constant at any price.
- Inelastic Demand: Steep slope – Price increase causes a small decrease in demand.
- Unit Elastic: Diagonal curve – Proportional change in demand.
- Elastic Demand: Flatter slope – Price increase causes a significant decrease in demand.
- Perfectly Elastic: Horizontal line – Consumers buy at one specific price.
Price Elasticity of Supply (PES)
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PES measures how responsive quantity supplied is to price changes.
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Formula: PES = (% change in quantity supplied) / (% change in price)
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PES > 1: Elastic supply
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PES < 1: Inelastic supply
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PES = 1: Unit elastic supply
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Factors affecting PES include time, resource availability and production flexibility.
Price Elasticity & Total Revenue
- Total Revenue (TR) = Price × Quantity Sold.
- Inelastic demand (PED < 1): Higher price increases TR.
- Elastic demand (PED > 1): Higher price decreases TR.
Government Policies & Elasticity
- Taxes: Inelastic demand = consumers bear most of the tax burden.
- Subsidies: Elastic supply = subsidies increase output more.
- Price controls:
- Price ceilings (max price): Shortages
- Price floors (min price): Surpluses
Income & Cross-Price Elasticity
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Income Elasticity of Demand (YED):
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Formula: YED = (% change in quantity demanded) / (% change in income)
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YED > 0: Normal good – demand increases with income.
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YED < 0: Inferior good – demand decreases with income.
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Cross-Price Elasticity (XED):
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Formula: XED = (% change in quantity demanded of good A) / (% change in price of good B)
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XED > 0: Substitute goods.
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XED < 0: Complementary goods.
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