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Questions and Answers
Which of the following best defines price elasticity of demand?
Which of the following best defines price elasticity of demand?
- A measure of how much price changes in response to a change in quantity demanded
- A measure of how much quantity demanded changes in response to a change in price (correct)
- A measure of how much revenue changes in response to a change in quantity demanded
- A measure of how much revenue changes in response to a change in price
Which of the following describes elastic demand?
Which of the following describes elastic demand?
- A weak response in quantity demanded to a change in price
- A strong response in quantity demanded to a change in price (correct)
- A response in revenue to a change in price
- A proportional response in quantity demanded to a change in price
What is unit elastic demand?
What is unit elastic demand?
- A strong response in quantity demanded to a change in price
- A proportional response in quantity demanded to a change in price (correct)
- A weak response in quantity demanded to a change in price
- A response in revenue to a change in price
Which of the following describes inelastic demand?
Which of the following describes inelastic demand?
Why do business firms need to understand price elasticity of demand for the goods/services they sell?
Why do business firms need to understand price elasticity of demand for the goods/services they sell?
Which of the following best defines market equilibrium?
Which of the following best defines market equilibrium?
What happens when there is excess demand in the market?
What happens when there is excess demand in the market?
What happens when there is excess supply in the market?
What happens when there is excess supply in the market?
What is price equilibrium?
What is price equilibrium?
What determines the prices of goods and services and the quantity produced?
What determines the prices of goods and services and the quantity produced?
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Study Notes
Price Elasticity of Demand
- Price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price or other influential factors.
- Elastic demand: when a small price change leads to a large change in quantity demanded.
Types of Demand Elasticity
- Unit elastic demand: when the percentage change in quantity demanded is equal to the percentage change in price.
Inelastic Demand
- Inelastic demand: when a large price change leads to a small change in quantity demanded.
Importance of Understanding Price Elasticity of Demand
- Business firms need to understand price elasticity of demand to set prices that maximize revenue and profit.
Market Equilibrium
- Market equilibrium: a state where the quantity of a good that consumers are willing to buy (demand) equals the quantity that producers are willing to supply.
Imbalance in the Market
- Excess demand: when the quantity demanded is greater than the quantity supplied, leading to a shortage.
- Excess supply: when the quantity supplied is greater than the quantity demanded, leading to a surplus.
Price Equilibrium
- Price equilibrium: the price at which the quantity demanded equals the quantity supplied.
Market Forces
- The prices of goods and services and the quantity produced are determined by the interaction of supply and demand forces in the market.
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