Price Elasticity of Demand Quiz

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Questions and Answers

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?

Total revenue fluctuates unpredictably

Total revenue increases (correct)

Total revenue remains unchanged

Total revenue decreases

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?

Perfect Competition Signup and view all the answers

In a case of inelastic demand, what is the expected effect of raising prices on total revenue?

Total revenue increases Signup and view all the answers

If the price elasticity of demand is greater than 1, how is the demand characterized?

Elastic Signup and view all the answers

What happens to the quantity demanded when the price decreases, assuming ceteris paribus?

It increases Signup and view all the answers

What is the price elasticity of demand when it is perfectly inelastic?

Zero Signup and view all the answers

In the provided example, what was the price elasticity of demand (PED) for Uber rides after a price cut?

2 Signup and view all the answers

Which of the following is a determinant of elasticity?

Proportion of income spent on the good Signup and view all the answers

Which of the following statements about inelastic demand is true?

Price changes have a minimal effect on quantity demanded Signup and view all the answers

In a monopolistic competition market, what is the behavior of firms regarding pricing?

Firms can influence prices but are not price makers. Signup and view all the answers

What should a company with elastic demand do to increase revenue?

Decrease prices Signup and view all the answers

Which market structure is characterized by a single firm dominating the market?

Monopoly Signup and view all the answers

During a drought, why might corn farmers increase their revenue despite a reduced supply?

The price of corn increases and demand is inelastic. Signup and view all the answers

What key factor contributes directly to determining sales in a business?

Revenue from pricing and quantity sold Signup and view all the answers

What is a characteristic of perfectly competitive markets in relation to consumer and producer knowledge?

Both producers and consumers have perfect knowledge. Signup and view all the answers

Which market structure is characterized by many buyers and sellers where products are identical?

Perfect competition Signup and view all the answers

What is a common misconception about price elasticity of demand?

Inelastic demand implies no change in quantity Signup and view all the answers

How does price responsiveness influence business decisions?

It affects how businesses set prices and forecast sales Signup and view all the answers

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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Description

Test your understanding of Price Elasticity of Demand (PED) and its implications in changing market conditions. This quiz will cover the calculation of PED, its classifications, and how it affects revenue based on demand elasticity. Challenge yourself to apply the concepts effectively!