Podcast
Questions and Answers
Which of the following best describes elasticity in economics?
Which of the following best describes elasticity in economics?
- The degree to which demand or supply changes in response to a change in price. (correct)
- The total revenue generated by the sale of a product.
- The cost of producing one more unit of a good.
- The point at which supply equals demand.
If the price elasticity of demand for a product is 1.5, what does this indicate?
If the price elasticity of demand for a product is 1.5, what does this indicate?
- The demand is elastic. (correct)
- The demand is perfectly inelastic.
- The demand is inelastic.
- The demand is unit elastic.
Which of the following goods is most likely to have an inelastic demand?
Which of the following goods is most likely to have an inelastic demand?
- Essential medicines (correct)
- Luxury yachts
- Designer clothing
- Restaurant meals
If a firm increases the price of its product and total revenue decreases, what can be inferred about the demand for the product?
If a firm increases the price of its product and total revenue decreases, what can be inferred about the demand for the product?
Which factor tends to make the demand for a product more elastic?
Which factor tends to make the demand for a product more elastic?
What does a perfectly inelastic demand curve look like?
What does a perfectly inelastic demand curve look like?
A local coffee shop reduces the price of its lattes by 10%, and the quantity demanded increases by 15%. What is the price elasticity of demand for lattes?
A local coffee shop reduces the price of its lattes by 10%, and the quantity demanded increases by 15%. What is the price elasticity of demand for lattes?
If a product has a unit elastic demand, what happens to total revenue when the price increases?
If a product has a unit elastic demand, what happens to total revenue when the price increases?
In the context of price elasticity of demand, what does 'price volatility' refer to?
In the context of price elasticity of demand, what does 'price volatility' refer to?
Uber's surge pricing is an example of:
Uber's surge pricing is an example of:
Which scenario illustrates the concept of perfectly elastic demand?
Which scenario illustrates the concept of perfectly elastic demand?
How does the time elapsed since a price change affect price elasticity of demand?
How does the time elapsed since a price change affect price elasticity of demand?
A business discovers that the demand for its product is inelastic. To increase total revenue, the business should:
A business discovers that the demand for its product is inelastic. To increase total revenue, the business should:
Which product is most likely to exhibit price discrimination?
Which product is most likely to exhibit price discrimination?
If the price of a good increases from $10 to $12 and the quantity demanded decreases from 100 units to 80 units, what is the price elasticity of demand using the midpoint formula?
If the price of a good increases from $10 to $12 and the quantity demanded decreases from 100 units to 80 units, what is the price elasticity of demand using the midpoint formula?
Which of the following best describes the 'total revenue test'?
Which of the following best describes the 'total revenue test'?
A city implements a new tax on hotel rooms. If the demand for hotel rooms is elastic, who is likely to bear the larger burden of this tax?
A city implements a new tax on hotel rooms. If the demand for hotel rooms is elastic, who is likely to bear the larger burden of this tax?
If a 5% increase in the price of concert tickets leads to a 1% decrease in the quantity demanded, the demand for concert tickets is:
If a 5% increase in the price of concert tickets leads to a 1% decrease in the quantity demanded, the demand for concert tickets is:
When is demand considered unit elastic?
When is demand considered unit elastic?
Which of the following is a limitation of using price elasticity of demand in real-world business decisions?
Which of the following is a limitation of using price elasticity of demand in real-world business decisions?
If a firm lowers its price, and total revenue remains unchanged, then the demand is?
If a firm lowers its price, and total revenue remains unchanged, then the demand is?
Assume the value of elasticity for a product is 0. What does this indicate?
Assume the value of elasticity for a product is 0. What does this indicate?
If a supplier decides to charge different prices for the same product to different segments of the market, this is an example of?
If a supplier decides to charge different prices for the same product to different segments of the market, this is an example of?
When the price of a Sony PlayStation rises by 10%, the quantity of PlayStation's demanded decreases by 20%. What type of demand is this?
When the price of a Sony PlayStation rises by 10%, the quantity of PlayStation's demanded decreases by 20%. What type of demand is this?
Is demand considered more elastic, inelastic, or unit elastic if elasticity results in the value = 4?
Is demand considered more elastic, inelastic, or unit elastic if elasticity results in the value = 4?
Between January and March, a business that makes suitcases aimed at holidaying tourists has seen a drop in sales by 15% compared to the same time last year. This was a consequence of increasing prices by 5%. What type of demand is this?
Between January and March, a business that makes suitcases aimed at holidaying tourists has seen a drop in sales by 15% compared to the same time last year. This was a consequence of increasing prices by 5%. What type of demand is this?
What would be considered a necessity?
What would be considered a necessity?
Assume the price of an item has decreased, but the total revenue has increased. What does this indicate?
Assume the price of an item has decreased, but the total revenue has increased. What does this indicate?
When demand is inelastic:
When demand is inelastic:
Identify the true statement.
Identify the true statement.
Flashcards
What is Elasticity?
What is Elasticity?
Responsiveness of quantity demanded to a change in another variable.
Price Elasticity of Demand
Price Elasticity of Demand
Measures how much the quantity demanded of a good responds to a change in the price of that good.
What is Elastic Demand?
What is Elastic Demand?
Demand is sensitive to price changes; absolute value is greater than 1.
What is Inelastic Demand?
What is Inelastic Demand?
Signup and view all the flashcards
What is Perfectly Elastic Demand?
What is Perfectly Elastic Demand?
Signup and view all the flashcards
What is Perfectly Inelastic Demand?
What is Perfectly Inelastic Demand?
Signup and view all the flashcards
What is Unit Elastic Demand?
What is Unit Elastic Demand?
Signup and view all the flashcards
What is Total Revenue?
What is Total Revenue?
Signup and view all the flashcards
What is the Total Revenue Test?
What is the Total Revenue Test?
Signup and view all the flashcards
TR test - Elastic?
TR test - Elastic?
Signup and view all the flashcards
TR test - Inelastic?
TR test - Inelastic?
Signup and view all the flashcards
Availability of Substitutes
Availability of Substitutes
Signup and view all the flashcards
Time elapsed since price change
Time elapsed since price change
Signup and view all the flashcards
Necessity
Necessity
Signup and view all the flashcards
Luxury
Luxury
Signup and view all the flashcards
Price Discrimination
Price Discrimination
Signup and view all the flashcards
Price Volatility
Price Volatility
Signup and view all the flashcards
Study Notes
- The session aims to define and calculate price elasticity of demand, explain influencing factors, and explore the relationship between total revenue and price elasticity.
Demand Elasticity Types
- Elasticity is the measure of how much the quantity demanded changes in response to a change in another variable.
- Price elasticity of demand relates to changes in price.
- Income elasticity of demand relates to changes in income.
- Cross elasticity of demand relates to changes in the price of a complement or substitute.
Demand and Supply
- Demand for a good depends on its price, consumer income, and prices of other goods.
- Supply depends on price and variables affecting production cost.
- If coffee prices increase, demand falls and supply rises.
Elasticity Defined
- Elasticity helps answer questions about the responsiveness of quantity demanded or supplied to changes in price or income.
- Elasticity measures the sensitivity of one variable to changes in another.
- It's a number representing the percentage change in one variable for every 1% change in another.
Price Elasticity of Demand
- Price elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price.
- The formula includes percentage change in quantity divided by the percentage change in price.
- Elasticity method can cause change direction to influence the value of price elasticity of demand.
Elastic, Unit Elastic, Inelastic Demand
- Demand is elastic if the absolute value of price elasticity of demand is greater than 1.
- Demand is unit elastic if the absolute value of price elasticity of demand is equal to 1.
- Demand is inelastic if the absolute value of price elasticity of demand is less than 1.
- Demand is perfectly elastic if quantity demanded changes significantly with almost no change in price.
- Demand is perfectly inelastic if quantity demanded remains constant regardless of price changes. Perfectly inelasticity = zero
Usefulness of Price Elasticity of Demand for Producers
- PED estimates help firms predict the impact of price changes on total revenue.
- PED assists in understanding price volatility due to supply changes.
- PED helps to assess the effect of indirect taxes on price and quantity.
- Businesses use PED for price discrimination, charging different prices to different market segments.
- Businesses usually charge higher prices to consumers with price inelastic demand.
- Uber, for example, uses surge pricing based on demand elasticity.
Uber & Surge Pricing
- Uber is a taxi service operating in over 50 countries.
- Uber uses surge pricing (dynamic pricing).
- Uber raises fares when demand exceeds supply.
- The aim is to encourage more drivers to increase supply.
- This strategy takes advantage of low price elasticity of demand during busy times.
Factors Influencing Demand Elasticity
- Availability of Substitutes
- Demand is elastic if substitutes are readily available.
- Demand is inelastic if substitutes are hard to find.
- Luxury vs. Necessity
- Necessities have poor substitutes and inelastic demand (e.g., food, housing).
- Luxuries have many substitutes and elastic demand (e.g., exotic vacations).
- Time Elapsed Since Price Change
- The longer consumers have to adjust or store a good, the more elastic the demand becomes.
Total Revenue and Price Elasticity
-
Total revenue is the amount sellers receive, calculated as price multiplied by quantity sold.
-
Total revenue test: estimates price elasticity by observing how total revenue changes with price.
- If demand is elastic: A percentage rise in price brings a larger percentage decrease in quantity demanded, and TR decreases.
- If demand is inelastic: A percentage rise in price brings a smaller percentage decrease in quantity demanded, and TR increases.
-
Total Revenue (TR) Test :
- If price and total revenue change in opposite directions, demand is elastic
- If a price change leaves total revenue unchanged, demand is unit elastic
- If price and total revenue change in the same direction, demand is inelastic
Limitations of Elasticities
- Problems arise from inaccurate or incomplete data collection.
- Consumer price sensitivity changes over time.
- Elasticity of demand varies by region or time.
- Elasticity varies within product ranges, such as economy and premium products.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
