Questions and Answers
What is the effect of a decrease in the price of a product on its demand?
What type of elasticity of demand is represented by a PED value of 0.5?
Which of the following is an example of a determinant of demand?
What is the formula to calculate price elasticity of demand?
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Which of the following goods would have an income elasticity of demand greater than 0?
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What is the effect of an increase in the price of a substitute good on the demand for another good?
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What type of elasticity of demand is represented by a PED value of 2?
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Which of the following is an example of a complement good?
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What is the effect of effective advertising on the demand for a product?
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Which of the following determinants of demand is influenced by changes in population size, age, and distribution?
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Study Notes
Demand
Determinants of Demand
The demand for a product is influenced by several factors, including:
- Price of the product: The lower the price, the higher the demand.
- Income of the consumer: An increase in income leads to an increase in demand.
- Price of related goods: The price of substitutes (e.g. coffee and tea) and complements (e.g. coffee and sugar) affects demand.
- Tastes and preferences: Changes in consumer preferences can increase or decrease demand.
- Population and demographics: Changes in population size, age, and distribution affect demand.
- Advertising and marketing: Effective advertising can increase demand.
- Seasonality: Demand can vary depending on the time of year or season.
Elasticity of Demand
Elasticity of demand measures how responsive the quantity demanded is to changes in its determinants. It is calculated as:
-
Price elasticity of demand (PED): Percentage change in quantity demanded / Percentage change in price
- Elastic demand: PED > 1, quantity demanded changes significantly in response to price changes.
- Inelastic demand: PED < 1, quantity demanded changes slightly in response to price changes.
- Unit elastic demand: PED = 1, quantity demanded changes proportionally to price changes.
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Income elasticity of demand: Percentage change in quantity demanded / Percentage change in income
- Normal goods: Income elasticity > 0, demand increases with income.
- Inferior goods: Income elasticity < 0, demand decreases with income.
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Cross-price elasticity of demand: Percentage change in quantity demanded of one good / Percentage change in price of another good
- Substitutes: Cross-price elasticity > 0, demand increases when the price of the substitute increases.
- Complements: Cross-price elasticity < 0, demand decreases when the price of the complement increases.
Demand
Determinants of Demand
- Lower price of a product leads to higher demand.
- Increase in consumer income leads to an increase in demand.
- The price of related goods, such as substitutes and complements, affects demand.
- Changes in consumer tastes and preferences can increase or decrease demand.
- Changes in population size, age, and distribution affect demand.
- Effective advertising can increase demand.
- Demand can vary depending on the time of year or season.
Elasticity of Demand
Types of Elasticity
- Price elasticity of demand (PED) measures responsiveness to price changes.
- Elastic demand: PED > 1, quantity demanded changes significantly with price.
- Inelastic demand: PED < 1, quantity demanded changes slightly with price.
- Unit elastic demand: PED = 1, quantity demanded changes proportionally with price.
Income Elasticity of Demand
- Measures responsiveness to income changes.
- Normal goods: income elasticity > 0, demand increases with income.
- Inferior goods: income elasticity < 0, demand decreases with income.
Cross-Price Elasticity of Demand
- Measures responsiveness to price changes of another good.
- Substitutes: cross-price elasticity > 0, demand increases when substitute's price increases.
- Complements: cross-price elasticity < 0, demand decreases when complement's price increases.
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Description
Learn about the factors that influence the demand for a product, including price, income, related goods, and consumer preferences.
