10 Questions
Which of the following best defines price elasticity of demand?
A measure of how much quantity demanded changes in response to a change in price
Which of the following describes elastic demand?
A strong response in quantity demanded to a change in price
What is unit elastic demand?
A proportional response in quantity demanded to a change in price
Which of the following describes inelastic demand?
A weak response in quantity demanded to a change in price
Why do business firms need to understand price elasticity of demand for the goods/services they sell?
To decide on their optimal price strategy
Which of the following best defines market equilibrium?
The situation where, at a certain price level, quantity supplied and quantity demanded of a product is equal.
What happens when there is excess demand in the market?
Price rises to manage the shortage, leading to an expansion of supply.
What happens when there is excess supply in the market?
Price drops due to excess supply.
What is price equilibrium?
The point at which the price of a product or service matches the amount that consumers are willing to pay and the quantity that producers are willing to supply.
What determines the prices of goods and services and the quantity produced?
Excess demand
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.
Test your knowledge of price elasticity of demand and its different types with this quiz. Learn about elastic, unit elastic, and inelastic demand and how they relate to changes in price.
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