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?

They would not sell any bananas. Signup and view all the answers

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

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

What is the characteristic of a relatively elastic demand?

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

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

The flatter the demand curve, the more price sensitive consumers are. 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?

The demand for the good is relatively elastic. Signup and view all the answers

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

A small change in price will lead to a large change in quantity demanded. 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%?

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

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

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

What is the characteristic of a unitary elastic demand?

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

What does the Price Elasticity of Demand measure?

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

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

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

What is the importance of understanding elasticity in consumer demand?

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

What is the characteristic of a perfectly inelastic demand?

No change in the quantity demanded when there is a price change 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?

There would be no change in quantity demanded Signup and view all the answers

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

A vertical demand curve Signup and view all the answers

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

Essential goods, such as life-saving medication Signup and view all the answers

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

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

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

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. Signup and view all the answers

What is the characteristic of a relatively inelastic demand?

The percentage change in price outweighs the percentage change in quantity demanded. Signup and view all the answers

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

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. Signup and view all the answers

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

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

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

The government can raise large sums of money without significantly reducing consumption. 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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Description

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

Price Elasticity of Demand SAQ

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Podcast

Questions and Answers

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

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

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

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 characteristic of a relatively elastic demand?

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?

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%?

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

What is the characteristic of a unitary elastic demand?

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 importance of understanding elasticity in consumer 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 shape of demand curve indicates that demand is perfectly inelastic?

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

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?

What is the characteristic of 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?

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

Study Notes

Perfectly Elastic Demand

Example

Perfectly Elastic Demand

Demand Elasticity

Demand Curve and Price Sensitivity

Price Elasticity of Demand (PED)

Types of Elasticity

Unitary Elastic

Perfectly Inelastic Demand

Indirect Taxes and Elasticity of Demand

Studying That Suits You

Description

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