Price Elasticity of Demand MCQ 2

Price Elasticity of Demand (PED)

• Measures the percentage change in the quantity demanded of a good/service in response to a percentage change in price.
• Refers to the degree of sensitivity or responsiveness of consumer demand to: • A change in the price of a good/service • A change in income

Types of Elasticity

Unitary Elastic

• Demand for a good/service is unitary elastic when: • The percentage change in the quantity demanded equals the percentage change in price

Elasticity of Demand

• Perfectly inelastic demand means there is no change in the quantity demanded when there is a price change.
• Example: a patient with high blood pressure would continue to buy their essential medication at the same quantity, even if the price increases in all pharmacies.

Relatively Inelastic Demand

• Goods with relatively inelastic demand are often targeted by the government for indirect taxes.
• Examples of such goods include fuel and tobacco products.
• The goal of taxing these goods is to discourage consumption.
• The government can raise significant revenue by taxing these goods, as the fall in demand is outweighed by the rise in price.
• Demand is relatively inelastic if the percentage change in price is greater than the percentage change in quantity demanded.

Test your understanding of Price Elasticity of Demand, including unitary elasticity, and how it affects consumer demand in microeconomics.