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Questions and Answers
What shape does the demand curve take under perfectly elastic demand?
What shape does the demand curve take under perfectly elastic demand?
- Downward sloping
- Vertical
- Horizontal (correct)
- Upward sloping
What happens to total revenue if prices are lowered when demand is elastic?
What happens to total revenue if prices are lowered when demand is elastic?
- Total revenue fluctuates unpredictably
- Total revenue increases (correct)
- Total revenue remains unchanged
- Total revenue decreases
What does the price elasticity of demand measure?
What does the price elasticity of demand measure?
- How responsive buyers are to price changes (correct)
- The total revenue generated from sales
- The relationship between supply and demand
- The average price level of a product
What type of market structure is characterized by a large number of suppliers and no individual firm has the power to set prices?
What type of market structure is characterized by a large number of suppliers and no individual firm has the power to set prices?
In a case of inelastic demand, what is the expected effect of raising prices on total revenue?
In a case of inelastic demand, what is the expected effect of raising prices on total revenue?
If the price elasticity of demand is greater than 1, how is the demand characterized?
If the price elasticity of demand is greater than 1, how is the demand characterized?
What happens to the quantity demanded when the price decreases, assuming ceteris paribus?
What happens to the quantity demanded when the price decreases, assuming ceteris paribus?
What is the price elasticity of demand when it is perfectly inelastic?
What is the price elasticity of demand when it is perfectly inelastic?
In the provided example, what was the price elasticity of demand (PED) for Uber rides after a price cut?
In the provided example, what was the price elasticity of demand (PED) for Uber rides after a price cut?
Which of the following is a determinant of elasticity?
Which of the following is a determinant of elasticity?
Which of the following statements about inelastic demand is true?
Which of the following statements about inelastic demand is true?
In a monopolistic competition market, what is the behavior of firms regarding pricing?
In a monopolistic competition market, what is the behavior of firms regarding pricing?
What should a company with elastic demand do to increase revenue?
What should a company with elastic demand do to increase revenue?
Which market structure is characterized by a single firm dominating the market?
Which market structure is characterized by a single firm dominating the market?
During a drought, why might corn farmers increase their revenue despite a reduced supply?
During a drought, why might corn farmers increase their revenue despite a reduced supply?
What key factor contributes directly to determining sales in a business?
What key factor contributes directly to determining sales in a business?
What is a characteristic of perfectly competitive markets in relation to consumer and producer knowledge?
What is a characteristic of perfectly competitive markets in relation to consumer and producer knowledge?
Which market structure is characterized by many buyers and sellers where products are identical?
Which market structure is characterized by many buyers and sellers where products are identical?
What is a common misconception about price elasticity of demand?
What is a common misconception about price elasticity of demand?
How does price responsiveness influence business decisions?
How does price responsiveness influence business decisions?
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Study Notes
Demand Responsiveness and Changing Market Conditions
- Price Elasticity of Demand (PED) measures how responsive buyers are to price changes.
- PED is calculated as: (% change in quantity demanded) / (% change in price).
- A PED greater than 1 indicates elastic demand, meaning a price change significantly affects the quantity demanded.
- A PED less than 1 indicates inelastic demand, meaning a price change has a relatively small impact on the quantity demanded.
- Perfectly elastic demand has an infinite PED, meaning there is an unlimited response to any price change (horizontal demand curve).
- Perfectly inelastic demand has a PED of 0, meaning there is no response to any price change (vertical demand curve).
- Elastic demand means lowering prices increases revenue, while raising prices decreases revenue.
- Inelastic demand means raising prices increases revenue, while lowering prices decreases revenue.
- Factors influencing PED:
- Availability of substitutes: More substitutes means more elastic demand.
- Proportion of income spent on the good: Smaller proportion means less elastic demand.
- Time period to adjust consumption: Longer time periods lead to more elastic demand.
- Market competitiveness: More competition means greater elasticity for individual suppliers.
Market Structures
- Perfect Competition:
- Many firms, none with market power to influence price (price takers).
- Free entry and exit.
- Perfect knowledge of the market for buyers and sellers.
- Example: Agriculture (though no perfect examples exist).
- Demand curve is horizontal for individual firms.
- Monopoly:
- Single firm dominates the market.
- High barriers to entry.
- Can set price, subject to consumer demand.
- Examples: National Grid, Microsoft operating system, Amazon retail.
- Monopolistic Competition:
- Many firms competing with differentiated products.
- Some control over price, but limited by competition.
- Easy entry and exit.
- Examples: Restaurants, clothing stores, hair salons.
- Oligopoly:
- Few dominant firms control a large market share.
- Interdependence between firms, as actions of one impact others.
- Significant barriers to entry.
- Examples: Airline industry, car manufacturing, telecommunications.
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