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Price Elasticity of Demand Concepts
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Price Elasticity of Demand Concepts

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@AttentiveRococo

Questions and Answers

The price elasticity of demand coefficient measures:

  • Buyer responsiveness to price changes (correct)
  • How far business executives can stretch their fixed costs
  • The extent to which a demand curve shifts as incomes change
  • The slope of the demand curve

    • The basic formula for the price elasticity of demand coefficient is:

  • Percentage change in price/percentage change in quantity demanded
  • Percentage change in quantity demanded/percentage change in price (correct)
  • Absolute decline in price/absolute increase in quantity demanded
  • Absolute decline in quantity demanded/absolute increase in price

    • The demand for a product is inelastic with respect to price if:

  • The elasticity coefficient is greater than 1
  • A drop in price is accompanied by a decrease in the quantity demanded
  • Consumers are largely unresponsive to a per unit price change (correct)
  • A drop in price is accompanied by an increase in the quantity demanded

    • If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:

    <p>Increase the quantity demanded by about 25 percent</p> Signup and view all the answers

    Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:

    <p>1.37</p> Signup and view all the answers

    Which of the following is not characteristic of the demand for a commodity that is elastic?

    <p>The elasticity coefficient is less than one</p> Signup and view all the answers

    If the demand for product X is inelastic, a 4 percent increase in the price of X will:

    <p>Decrease the quantity of X demanded by less than 4 percent</p> Signup and view all the answers

    If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:

    <p>A is a complementary good</p> Signup and view all the answers

    A perfectly inelastic demand schedule:

    <p>Can be represented by a line parallel to the vertical axis</p> Signup and view all the answers

    The larger the coefficient of price elasticity of demand for a product, the:

    <p>Smaller the resulting price change for an increase in supply</p> Signup and view all the answers

    Most demand curves are relatively elastic in the upper-left portion because the original price:

    <p>From which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small</p> Signup and view all the answers

    The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:

    <p>20 percent reduction in price</p> Signup and view all the answers

    Suppose Aiyanna's pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week:

    <p>Demand will become less price elastic</p> Signup and view all the answers

    The price elasticity of demand of a straight-line demand curve is:

    <p>Elastic in high-price ranges and inelastic on low-price ranges</p> Signup and view all the answers

    A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the:

    <p>More inelastic the demand for the product</p> Signup and view all the answers

    If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:

    <p>Increase the amount demanded by more than 10 percent</p> Signup and view all the answers

    The price elasticity of demand is:

    <p>Negative, but the minus sign is ignored</p> Signup and view all the answers

    For a linear demand curve:

    <p>Demand is elastic at high prices</p> Signup and view all the answers

    The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range:

    <p>Is elastic</p> Signup and view all the answers

    Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded:

    <p>Decreased by 9 percent</p> Signup and view all the answers

    The price elasticity of demand for beef is about 0.60. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to:

    <p>Decrease by approximately 12 percent</p> Signup and view all the answers

    The elasticity of demand:

    <p>Tends to be elastic in high-price ranges and inelastic in low-price ranges</p> Signup and view all the answers

    If a demand for a product is elastic, the value of the price elasticity coefficient is:

    <p>Greater than one</p> Signup and view all the answers

    The concept of price elasticity of demand measures:

    <p>The sensitivity of consumer purchases to price changes</p> Signup and view all the answers

    Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:

    <p>1.2</p> Signup and view all the answers

    If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then:

    <p>Demand is elastic</p> Signup and view all the answers

    A perfectly inelastic demand curve:

    <p>Graphs as a line parallel to the vertical axis</p> Signup and view all the answers

    Moving upward on a downward-sloping straight-line demand curve, we find that price elasticity:

    <p>Decreases continuously</p> Signup and view all the answers

    If the price elasticity of demand for gasoline is 0.20:

    <p>A 10 percent rise in the price of gasoline will decrease the amount purchased by 2 percent</p> Signup and view all the answers

    In which price range of the accompanying demand schedule is demand elastic?

    <p>$4-$3</p> Signup and view all the answers

    When the percentage change in price is greater than the resulting percentage change in quantity demanded:

    <p>Demand may be either elastic or inelastic</p> Signup and view all the answers

    Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of:

    <p>W and Y</p> Signup and view all the answers

    Which of the following statements is not correct?

    <p>In the range of prices in which demand is elastic, total revenue will diminish as price decreases</p> Signup and view all the answers

    In which of the following instances will total revenue decline?

    <p>Price rises and demand is elastic</p> Signup and view all the answers

    If a firm's demand for labor is elastic, a union-negotiated wage increase will:

    <p>Cause the firm's total payroll to decline</p> Signup and view all the answers

    Study Notes

    Price Elasticity of Demand Concepts

    • The price elasticity of demand (PED) coefficient indicates buyer responsiveness to price changes.
    • PED is calculated using the formula: percentage change in quantity demanded / percentage change in price.

    Demand Characteristics

    • Inelastic demand signifies that consumers are largely unresponsive to price changes (elasticity coefficient less than 1).
    • The demand curve for a product is elastic if the relative change in quantity demanded surpasses the relative change in price (elasticity coefficient greater than 1).

    PED Values and Effects

    • A price cut when PED is 2.5 increases quantity demanded by approximately 25%.
    • If demand is inelastic, a price increase leads to less than proportional decrease in quantity demanded.
    • A perfectly inelastic demand curve can be graphically represented by a vertical line (parallel to the vertical axis).

    Revenue and PED Relationships

    • Total revenue increases when the price is lowered if the demand is elastic; it decreases if the demand is inelastic.
    • The larger the price elasticity coefficient, the smaller the resulting price change for an increase in supply.

    Linear Demand Curves

    • Elasticity is not constant along a linear demand curve; it varies based on price levels, generally becoming more elastic at higher prices.

    Implications of Price Changes

    • When the price of a good falls significantly, and demand is elastic, the quantity demanded increases by a larger percentage than the price decrease.
    • Conversely, for inelastic goods, quantity demanded changes less than the price change during price fluctuations.

    Demand Schedules

    • Analyzing demand schedules helps identify in which price range demand is elastic or inelastic.
    • A leftward shift in the supply curve causes greater increases in equilibrium price when demand is more inelastic.

    Total Revenue and Elasticity

    • Total revenue outcomes can be predicted based on demand elasticity. A decline in price for elastic goods usually increases total revenue, while it decreases for inelastic goods.

    Misunderstandings About Elasticity

    • Often misinterpreted, a statement that demand remains inelastic if price changes do not affect the quantity demanded at all is incorrect. Demand can exhibit both elastic and inelastic characteristics depending on the price and context.

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    Description

    This quiz focuses on the key concepts of price elasticity of demand (PED). It covers how PED is calculated, the characteristics of elastic and inelastic demand, and the relationships between price changes and total revenue. Test your understanding of these vital economic principles.

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