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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?
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?
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?
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?
What would happen to a fruit seller's sales if they raised their price from 30c to 35c in a perfectly competitive market?
What is the implication of perfectly elastic demand on the seller's sales?
What is the implication of perfectly elastic demand on the seller's sales?
What is the characteristic of a relatively elastic demand?
What is the characteristic of a relatively elastic demand?
What is the relationship between the shape of the demand curve and consumer price sensitivity?
What is the relationship between the shape of the demand curve and consumer price sensitivity?
If a 2% increase in price results in a 5% decrease in quantity demanded, what can be said about the demand for the good?
If a 2% increase in price results in a 5% decrease in quantity demanded, what can be said about the demand for the good?
What is the implication of a relatively elastic demand on the quantity demanded of a good?
What is the implication of a relatively elastic demand on the quantity demanded of a good?
If a good has a relatively elastic demand, what would happen to the quantity demanded if the price were to increase by 1%?
If a good has a relatively elastic demand, what would happen to the quantity demanded if the price were to increase by 1%?
What is the main purpose of measuring the Price Elasticity of Demand (PED)?
What is the main purpose of measuring the Price Elasticity of Demand (PED)?
What is the characteristic of a unitary elastic demand?
What is the characteristic of a unitary elastic demand?
What does the Price Elasticity of Demand measure?
What does the Price Elasticity of Demand measure?
What is the relationship between the price change and the quantity demanded in a unitary elastic demand?
What is the relationship between the price change and the quantity demanded in a unitary elastic demand?
What is the importance of understanding elasticity in consumer demand?
What is the importance of understanding elasticity in consumer demand?
What is the characteristic of a perfectly inelastic demand?
What is the characteristic of a perfectly inelastic demand?
What would happen to the quantity demanded of a good if there is a price rise in a market with perfectly inelastic demand?
What would happen to the quantity demanded of a good if there is a price rise in a market with perfectly inelastic demand?
What shape of demand curve indicates that demand is perfectly inelastic?
What shape of demand curve indicates that demand is perfectly inelastic?
What type of goods are often characterized by perfectly inelastic demand?
What type of goods are often characterized by perfectly inelastic demand?
What does the concept of perfectly inelastic demand imply about consumer behavior?
What does the concept of perfectly inelastic demand imply about consumer behavior?
Why do governments tend to put indirect taxes on goods like fuel and tobacco products?
Why do governments tend to put indirect taxes on goods like fuel and tobacco products?
What is the characteristic of a relatively inelastic demand?
What is the characteristic of a relatively inelastic demand?
What is the effect of a tax on a good with a relatively inelastic demand?
What is the effect of a tax on a good with a relatively inelastic demand?
Why do consumers continue to buy goods like fuel and tobacco products despite price increases?
Why do consumers continue to buy goods like fuel and tobacco products despite price increases?
What is the benefit of taxing goods with a relatively inelastic demand from the government's perspective?
What is the benefit of taxing goods with a relatively inelastic demand from the government's perspective?
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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Description
Understanding perfectly elastic demand in a competitive market, where a small price increase leads to zero quantity demanded.
