Price Elasticity of Demand SAQ
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Questions and Answers

What happens to the quantity demanded of a good when there is a price rise in a perfectly elastic demand?

The quantity demanded falls to zero.

What is the shape of the demand curve in a market with perfectly elastic demand?

Flat

What type of market structure is characterized by perfectly elastic demand?

Perfectly competitive market

What would happen to a fruit seller's sales if they raised their price from 30c to 35c in a perfectly competitive market?

<p>They would not sell any bananas.</p> Signup and view all the answers

What is the implication of perfectly elastic demand on the seller's sales?

<p>The seller will lose all their sales if they raise their price.</p> Signup and view all the answers

What is the characteristic of a relatively elastic demand?

<p>The percentage change in price is outweighed by the percentage change in quantity demanded.</p> Signup and view all the answers

What is the relationship between the shape of the demand curve and consumer price sensitivity?

<p>The flatter the demand curve, the more price sensitive consumers are.</p> Signup and view all the answers

If a 2% increase in price results in a 5% decrease in quantity demanded, what can be said about the demand for the good?

<p>The demand for the good is relatively elastic.</p> Signup and view all the answers

What is the implication of a relatively elastic demand on the quantity demanded of a good?

<p>A small change in price will lead to a large change in quantity demanded.</p> Signup and view all the answers

If a good has a relatively elastic demand, what would happen to the quantity demanded if the price were to increase by 1%?

<p>The quantity demanded would decrease by a percentage greater than 1%.</p> Signup and view all the answers

What is the main purpose of measuring the Price Elasticity of Demand (PED)?

<p>To measure the degree of responsiveness of consumer demand to a change in price or income.</p> Signup and view all the answers

What is the characteristic of a unitary elastic demand?

<p>The percentage change in the quantity demanded is equal to the percentage change in price.</p> Signup and view all the answers

What does the Price Elasticity of Demand measure?

<p>The percentage change in the quantity demanded of a good/service as a result of a percentage change in price.</p> Signup and view all the answers

What is the relationship between the price change and the quantity demanded in a unitary elastic demand?

<p>A 1% rise in price would result in a 1% fall in quantity demanded.</p> Signup and view all the answers

What is the importance of understanding elasticity in consumer demand?

<p>It helps to understand the degree of responsiveness of consumer demand to a change in price or income.</p> Signup and view all the answers

What is the characteristic of a perfectly inelastic demand?

<p>No change in the quantity demanded when there is a price change</p> Signup and view all the answers

What would happen to the quantity demanded of a good if there is a price rise in a market with perfectly inelastic demand?

<p>There would be no change in quantity demanded</p> Signup and view all the answers

What shape of demand curve indicates that demand is perfectly inelastic?

<p>A vertical demand curve</p> Signup and view all the answers

What type of goods are often characterized by perfectly inelastic demand?

<p>Essential goods, such as life-saving medication</p> Signup and view all the answers

What does the concept of perfectly inelastic demand imply about consumer behavior?

<p>Consumers will continue to buy a good regardless of the price change</p> Signup and view all the answers

Why do governments tend to put indirect taxes on goods like fuel and tobacco products?

<p>Because these goods have a relatively inelastic demand, which means the fall in demand is outweighed by the rise in price, allowing the government to raise large sums of money while discouraging consumption.</p> Signup and view all the answers

What is the characteristic of a relatively inelastic demand?

<p>The percentage change in price outweighs the percentage change in quantity demanded.</p> Signup and view all the answers

What is the effect of a tax on a good with a relatively inelastic demand?

<p>The government can raise revenue and the fall in demand is outweighed by the rise in price, allowing the government to raise large sums of money while discouraging consumption.</p> Signup and view all the answers

Why do consumers continue to buy goods like fuel and tobacco products despite price increases?

<p>Because these goods have a relatively inelastic demand, meaning that consumers are not very responsive to price changes.</p> Signup and view all the answers

What is the benefit of taxing goods with a relatively inelastic demand from the government's perspective?

<p>The government can raise large sums of money without significantly reducing consumption.</p> Signup and view all the answers

Study Notes

Perfectly Elastic Demand

  • Demand for a good is perfectly elastic when a price rise leads to a quantity demanded of zero.
  • This occurs in a perfectly competitive market, where there are many sellers and buyers.
  • In a perfectly competitive market, sellers have no control over the market price.
  • If one seller raises their price, they will not sell any goods.

Example

  • 100 fruit sellers sell bananas in a market for 30c each.
  • If one seller raises their price to 35c, they will not sell any bananas, as buyers will opt for the cheaper alternatives.

Perfectly Elastic Demand

  • A good has perfectly elastic demand if a price rise leads to a fall in quantity demanded to zero.
  • In a perfectly competitive market, sellers face perfectly elastic demand.
  • Example: 100 fruit sellers sell bananas at 30c each; if one seller raises the price to 35c, they will not sell any bananas.
  • A flat demand curve is an indicator of perfectly elastic demand.

Demand Elasticity

  • A good has relatively elastic demand if its percentage change in price is outweighed by the percentage change in quantity demanded.
  • Example: a 1% increase in price leads to a 3.5% decrease in quantity demanded, indicating high elasticity.

Demand Curve and Price Sensitivity

  • The flatter the demand curve, the more price sensitive consumers are to the item.
  • This means that a small price change will lead to a larger change in quantity demanded.

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
  • Reflects the degree of sensitivity or responsiveness of consumer demand to a change in the price of a good/service or to a change in income

Types of Elasticity

Unitary Elastic

  • Demand for a good/service is unitary elastic if the percentage change in the quantity demanded is equal to the percentage change in price
  • Example: 1% rise in price would result in a 1% fall in quantity demanded

Perfectly Inelastic Demand

  • Demand for a good is perfectly inelastic when there is no change in the quantity demanded despite a price change.
  • Example: A patient with high blood pressure will continue to buy essential medication regardless of a price increase in all pharmacies.
  • A vertical demand curve indicates perfectly inelastic demand.
  • A significant price increase in essential medication will not affect the quantity demanded, remaining unchanged.

Indirect Taxes and Elasticity of Demand

  • Governments often impose indirect taxes on goods with relatively inelastic demand, such as fuel and tobacco products.
  • The goal of these taxes is to discourage consumption of these goods.
  • Inelastic demand means that the percentage change in price is greater than the percentage change in quantity demanded.
  • When the government raises taxes on these goods, the subsequent price increase leads to a smaller reduction in quantity demanded, resulting in a substantial revenue increase for the government.

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Understanding perfectly elastic demand in a competitive market, where a small price increase leads to zero quantity demanded.

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