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Questions and Answers
Which factor is NOT assumed to remain constant according to the law of demand?
Which factor is NOT assumed to remain constant according to the law of demand?
Giffen goods have a negative price effect and a positive income effect.
Giffen goods have a negative price effect and a positive income effect.
False
What is meant by extension of demand?
What is meant by extension of demand?
It occurs when quantity demanded increases due to a fall in price, with other factors constant.
According to the law of demand, demand may increase due to an increase in __________.
According to the law of demand, demand may increase due to an increase in __________.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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Which of the following describes articles of distinction?
Which of the following describes articles of distinction?
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Fashion goods do not affect consumer purchasing behavior despite their prices.
Fashion goods do not affect consumer purchasing behavior despite their prices.
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What is a key characteristic of Giffen goods?
What is a key characteristic of Giffen goods?
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Which of the following factors tends to make demand more elastic?
Which of the following factors tends to make demand more elastic?
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Goods with habitual consumption have elastic demand.
Goods with habitual consumption have elastic demand.
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What is the expected relationship between income level and price elasticity of demand?
What is the expected relationship between income level and price elasticity of demand?
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If a fall in the old price of a commodity causes a rise in total expenditure, then the price elasticity of demand is ______.
If a fall in the old price of a commodity causes a rise in total expenditure, then the price elasticity of demand is ______.
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Match each situation with its corresponding price elasticity of demand (Ed):
Match each situation with its corresponding price elasticity of demand (Ed):
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At which point on the demand curve is the elasticity of demand equal to 1?
At which point on the demand curve is the elasticity of demand equal to 1?
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At point M, the elasticity of demand is infinite.
At point M, the elasticity of demand is infinite.
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What does Ed represent in the context of demand curves?
What does Ed represent in the context of demand curves?
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At point B, the elasticity of demand is _____ 1.
At point B, the elasticity of demand is _____ 1.
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Which point represents perfectly inelastic demand?
Which point represents perfectly inelastic demand?
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Match the points with their elasticity of demand:
Match the points with their elasticity of demand:
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The upper segment of a linear demand curve has an elasticity of demand greater than 1.
The upper segment of a linear demand curve has an elasticity of demand greater than 1.
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Define the term 'unitary elastic demand'.
Define the term 'unitary elastic demand'.
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What is the formula for calculating the % change in demand?
What is the formula for calculating the % change in demand?
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The % change in price is calculated using the difference in demand.
The % change in price is calculated using the difference in demand.
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If the original demand is 80 and the new demand is 60, what is the difference in demand?
If the original demand is 80 and the new demand is 60, what is the difference in demand?
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The method used to measure price elasticity of demand at different points on the demand curve is called the ______ method.
The method used to measure price elasticity of demand at different points on the demand curve is called the ______ method.
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Match the following formulas with their corresponding calculations:
Match the following formulas with their corresponding calculations:
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What does an Ed value of 1 indicate about demand elasticity?
What does an Ed value of 1 indicate about demand elasticity?
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The original price is the price after a change has occurred.
The original price is the price after a change has occurred.
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If the original price is $40 and the new price is $60, what is the difference in price?
If the original price is $40 and the new price is $60, what is the difference in price?
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What does a decrease in demand signify?
What does a decrease in demand signify?
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Perfectly elastic demand means that demand is infinite at a given price.
Perfectly elastic demand means that demand is infinite at a given price.
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What is the price elasticity of demand when quantity demanded does not respond to any change in price?
What is the price elasticity of demand when quantity demanded does not respond to any change in price?
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The situation when a 10% decrease in price results in a 10% increase in demand is called __________.
The situation when a 10% decrease in price results in a 10% increase in demand is called __________.
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Match the types of price elasticity of demand with their characteristics:
Match the types of price elasticity of demand with their characteristics:
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Which of the following represents perfectly inelastic demand?
Which of the following represents perfectly inelastic demand?
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In relatively elastic demand, a price decrease results in a proportionally smaller increase in quantity demanded.
In relatively elastic demand, a price decrease results in a proportionally smaller increase in quantity demanded.
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What is indicated when Ed > 1?
What is indicated when Ed > 1?
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Study Notes
Law of Demand
- Holds when other factors influencing demand remain constant (ceteris paribus assumption).
- Examples of factors that can influence demand:
- Consumer preferences
- Prices of related goods
- Consumer income
- Consumer expectations about future availability of a good
Exceptions to Law of Demand
- Articles of Distinction: Goods with high prices, like diamonds, are often more in demand due to their exclusivity and perceived status (Veblen Goods).
- Ignorance: Consumers may purchase goods at a higher price due to a lack of knowledge about the market price.
- Fashion: Goods in fashion tend to be expensive, and consumers may purchase them despite high prices due to their appeal and desire to conform.
- Giffen Goods: These goods have a positive price effect (demand increases as price increases) and a negative income effect. This is a rare exception to the law of demand.
Movements Along the Demand Curve
- Extension of demand: Quantity demanded increases due to a fall in price, while other factors remain constant.
- Contraction of demand: Quantity demanded decreases due to a rise in price, while other factors remain constant.
Shifts in Demand Curve
- Increase in demand: Quantity demanded increases at a given price due to factors like an increase in population, favorable fashion trends, or increased consumer income.
- Decrease in demand: Quantity demanded decreases at a given price due to factors like a decrease in consumer income, unfavorable fashion trends, or decreased consumer confidence.
Price Elasticity of Demand
- Measures the responsiveness of quantity demanded to a change in price.
- Calculated as the percentage change in quantity demanded divided by the percentage change in price.
Types of Price Elasticity of Demand
- Perfectly Elastic Demand: Demand is infinite at a specific price, resulting in a horizontal demand curve.
- Perfectly Inelastic Demand: Quantity demanded does not change regardless of price, resulting in a vertical demand curve.
- Unitary Elastic Demand: Percentage change in quantity demanded equals the percentage change in price; Ed = 1.
- Relatively Elastic Demand: Percentage change in quantity demanded is greater than the percentage change in price; Ed > 1.
- Relatively Inelastic Demand: Percentage change in quantity demanded is less than the percentage change in price; Ed < 1.
Geometric Method of Measuring Price Elasticity of Demand
- Point method: Measures price elasticity at different points on a linear demand curve.
- Straight-line demand curve: Can be used to assess elasticity using the ratio of the upper segment of the demand curve to the lower segment at a specific price point.
Factors Affecting Price Elasticity of Demand
- Availability of Substitutes: If close substitutes exist, demand will be more elastic.
- Importance of Good in Budget: Commodities that represent a significant portion of a consumer's budget will have a higher elasticity.
- Durability of a Good: Non-durable goods tend to have more elastic demand.
- Postponement of Use: Goods whose use can be postponed will have more elastic demand.
- Income Level of the Buyer: Higher-income consumers tend to have a lower elasticity.
- Habits of Consumers: Habitual consumption of a good leads to inelastic demand.
Relationship Between Price Elasticity and Total Expenditure
- Unitary elasticity: Total expenditure on a good remains constant despite price changes.
- Elastic demand (Ed > 1): Total expenditure on a good increases as price decreases.
- Inelastic demand (Ed < 1): Total expenditure on a good decreases as price decreases.
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Description
Test your understanding of the Law of Demand and its exceptions such as Veblen and Giffen goods. This quiz explores factors influencing demand, including consumer preferences and market behaviors. Challenge your knowledge on how demand curves shift with varying conditions.
