Price Elasticity of Demand Quiz

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Questions and Answers

What happens to total revenue when demand is elastic and the price increases?

Total revenue decreases (correct)

Total revenue increases

Total revenue remains the same

Total revenue fluctuates unpredictably

Which of the following statements is true when demand is elastic?

Total revenue is unaffected by price changes

The percentage change in quantity demanded is less than the percentage change in price

Total revenue decreases when price decreases

Total revenue increases when price decreases (correct)

If the price is RM4 and consumers demand 100 units, what is the total revenue?

RM350

RM400 (correct)

RM450

RM300

What is the condition for demand to be classified as elastic?

Ed > 1 Signup and view all the answers

Which of the following scenarios illustrates price elasticity of demand?

Increasing the price leads to a significant drop in quantity demanded Signup and view all the answers

How would you describe the relationship between price and total revenue when demand is elastic?

Inverse relationship Signup and view all the answers

In the context of price elasticity of demand, what does Ed represent?

Price elasticity of demand Signup and view all the answers

What occurs to the total revenue rectangle when the price falls in elastic demand?

The rectangle expands Signup and view all the answers

What happens to total revenue when demand is inelastic and there is an increase in price?

Total revenue increases Signup and view all the answers

If the price is increased from RM1 to RM3 and total revenue changes from RM100 to RM240, how is the demand classified?

Inelastic Signup and view all the answers

Which of the following statements about unit elastic demand is true?

Percentage change in quantity demanded equals percentage change in price Signup and view all the answers

How does an increase from RM1 to RM2 affect the total revenue if quantity demanded at RM1 is 15?

Total revenue increases to RM20 Signup and view all the answers

What aspect of demand does an increase in total revenue indicate?

Demand is inelastic Signup and view all the answers

If a seller raises prices and total revenue decreases, what can be inferred about the demand?

Demand is elastic Signup and view all the answers

Which scenario represents a perfectly inelastic demand?

Quantity demanded remains the same regardless of price changes Signup and view all the answers

What is the impact on total revenue when there are small price changes in elastic demand?

Total revenue decreases significantly Signup and view all the answers

What characterizes a good with elastic demand?

Quantity demanded changes significantly with price changes Signup and view all the answers

If the price elasticity of demand is measured at Ɛd = 2, what does this indicate?

A 1% increase in price will decrease quantity demanded by 2% Signup and view all the answers

Which of the following statements is true regarding inelastic demand?

The price elasticity of demand is less than 1 Signup and view all the answers

What is a common type of good that demonstrates inelastic demand?

Essentials like medications and basic food items Signup and view all the answers

In what scenario might a good have elastic demand?

The good has several close substitutes available Signup and view all the answers

How can we define the percentage change in quantity demanded relative to price for goods with elastic demand?

Percentage change in quantity demanded is greater than the percentage change in price Signup and view all the answers

What does a price elasticity of demand of Ɛd < 1 imply about consumer behavior?

Consumers are indifferent to price changes Signup and view all the answers

Which best describes the impact on total revenue when a price decrease occurs for a product with elastic demand?

Total revenue increases Signup and view all the answers

What does a positive cross elasticity of demand indicate?

The goods are substitutes. Signup and view all the answers

If the cross elasticity of demand is -1.8, what can be inferred about the relationship between the two goods?

They are complements. Signup and view all the answers

In the calculation of cross elasticity of demand, what do ∆Qx and ∆Py represent?

Change in quantity demanded of good x and change in price of good y. Signup and view all the answers

When the price of good x increases by 1%, and the quantity demanded for good y increases by 1.5%, what is the cross elasticity of demand?

1.5 Signup and view all the answers

Which of the following pairs of goods is likely to exhibit a positive cross elasticity of demand?

Coffee and tea. Signup and view all the answers

If the cross elasticity of demand for two goods is calculated to be 0, what does this imply about the relationship between the goods?

They are independent goods. Signup and view all the answers

What is the significance of a cross elasticity of demand value greater than zero?

Indicates an increase in demand for substitute goods. Signup and view all the answers

In the formula for calculating cross elasticity of demand, what does the denominator represent?

The average price of the goods. Signup and view all the answers

What characterizes perfectly elastic supply?

Producers can offer any amount of output at the same price. Signup and view all the answers

Which of the following indicates perfectly inelastic supply?

Quantity supplied remains unaffected by price changes. Signup and view all the answers

Which factor has no influence on the elasticity of supply for a good?

Consumer demand. Signup and view all the answers

How is perfectly inelastic supply represented graphically?

As a vertical line. Signup and view all the answers

What stands true about the supply of perishable goods like vegetables?

The supply is perfectly inelastic. Signup and view all the answers

Which of the following best explains why a firm might have perfectly elastic supply?

The firm can produce goods without incurring additional costs. Signup and view all the answers

Which of the following does NOT affect a producer's supply decision?

Consumer preferences. Signup and view all the answers

What does a high elasticity of supply imply about a producer's ability to change output?

Producers can adjust output significantly based on price changes. Signup and view all the answers

What does price elasticity of demand measure?

The sensitivity of quantity demanded to price changes Signup and view all the answers

When calculating price elasticity of demand, how is responsiveness expressed?

In percentage terms Signup and view all the answers

What aspect makes the midpoint method superior for calculating elasticity?

It provides consistent results regardless of price change direction Signup and view all the answers

How would you calculate the percentage change in quantity demanded if it falls from 10 to 8?

20% Signup and view all the answers

In the elasticity formula, what does the denominator represent?

The percentage change in price Signup and view all the answers

What happens to price elasticity of demand when consumers become less sensitive to price changes?

It decreases Signup and view all the answers

If the price of an ice cream cone increases from RM2.00 to RM2.20, what is the percentage change in price?

10% Signup and view all the answers

If a good's price elasticity of demand is calculated as 2, what does this indicate?

Demand is elastic and quantity demanded changes significantly with price changes Signup and view all the answers

Study Notes

Course Information

Course title: Principle of Economics
Instructor: Noor Sa'adah Sabudin
Course code: SEFB

Chapter 4: Elasticity

Topics Covered

Price Elasticity of Demand: Formula, Degree, Elasticity and Total Revenue (TR) and Determinants
Cross Elasticity of Demand
Income Elasticity of Demand
Price Elasticity of Supply: Formula, Degree and Determinants

Learning Objectives

Calculate and interpret price elasticity of demand
Relate price elasticity of demand with total revenue (TR)
Explain price elasticity of demand determinants
Calculate cross elasticity of demand
Identify types of goods from the value of cross elasticity of demand
Calculate income elasticity of demand
Identify types of goods from the value of income elasticity of demand
Calculate price elasticity of supply
Interpret the value of price elasticity of supply
Explain price elasticity of supply determinants

Elasticity of Demand

Definition: A measure of how responsive the quantity demanded of a good is to a change in its price.
Measurement: Always in percentage terms. It's the percentage change in quantity demanded divided by the percentage change in price.

Calculating Price Elasticity of Demand

Formula: Percentage change in quantity demanded / Percentage change in price.

Calculating Price Elasticity of Demand: Example

If the price of an ice cream cone increases from RM2.00 to RM2.20 and the amount bought falls from 10 to 8 cones, the elasticity of demand is calculated as follows:
- ((10-8)/((10+8)/2)) x 100 / ((2.20-2.00)/((2.00+2.20)/2)) x 100 = 20% / 10% = 2

The Midpoint Method

Purpose: Provides a consistent elasticity calculation, regardless of which price/quantity is used as the starting point.
Formula: (Q₂ - Q₁)/[(Q₂ + Q₁)/2] / (P₂ - P₁)/[(P₂ + P₁)/2]

Why the Midpoint Method is Better

Consistency: Guarantees the same result calculation regardless of the direction of the price change.

Price Elasticity of Demand: Degrees/Types

Elastic (Ed > 1): %∆Q > %∆P
Inelastic (Ed < 1): %∆Q < %∆P
Unit Elastic (Ed = 1): %∆Q = %∆P
Perfectly Elastic (Ed = ∞): A small price change results in an infinitely large change in quantity.
Perfectly Inelastic (Ed = 0): Quantity demanded does not change, regardless of the price.

Factors Affecting Price Elasticity of Demand

Availability of close substitutes
Necessities versus luxuries
Proportion of income spent on the good
Time dimension/horizon
Habits

Cross Price Elasticity of Demand

Definition: Measures the responsiveness of demand for one good to a change in the price of a different good.
Positive Value: Substitute goods (e.g., Coca-Cola and Pepsi)
Negative Value: Complementary goods (e.g., cars and gasoline)
Zero Value: Goods that are not related.
Formula: Percentage change in quantity demanded of good Y / Percentage change in price of good X

Income Elasticity of Demand

Definition: Measures how responsive the quantity demanded of a good is to a change in consumers' income.
Positive Value: Normal goods (i.e. as income increase, demand for the good increase)
Negative Value: Inferior goods (i.e. as income increase, demand for the good decrease).

Price Elasticity of Supply

Definition: Measures how responsive the quantity supplied of a good is to a change in its price.
Elastic (Es > 1): %∆Qs > %∆P
Inelastic (Es < 1): %∆Qs < %∆P
Unit Elastic (Es = 1): %∆Qs = %∆P
Perfectly Elastic (Es = ∞): Any change in price results in an infinite change in the quantity supplied.
Perfectly Inelastic (Es = 0): Quantity supplied do not change regardless of the price.

Factors Affecting Price Elasticity of Supply

Time frame for supply decision
Durability of the goods
Cost of production
Resource substitution possibilities
Availability of stock/inventory

Price Elasticity and Total Revenue

Relationship: The relationship between price elasticity and total revenue (TR) is crucial for businesses pricing decisions.

Summary of Elasticity

Elasticity is a crucial concept for businesses and economists. It measures how sensitive quantities demanded/supplied are to price changes, providing insights into market behavior and product pricing strategies.

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Description

Test your understanding of price elasticity of demand through various scenarios and questions. This quiz covers the effects of price changes on total revenue when demand is elastic or inelastic. Challenge yourself to explain key concepts and calculations related to elasticity in economics.