16 Questions
What does a high price elasticity of demand indicate?
Consumers change their behavior significantly with price changes
In which scenario does a low price elasticity of supply occur?
Price changes have a small impact on production
What does a perfectly inelastic demand mean?
Quantity demanded is unaffected by price changes
When the price elasticity of supply is very high, what is likely to happen?
Significant shift in supply leading to shortages or surpluses
What does a perfectly elastic demand suggest?
Quantity demanded can be any amount at a specific price
How does cross-price elasticity differ from price elasticity of demand?
Cross-price elasticity examines the relationship between two different goods, while demand elasticity looks at the responsiveness of consumers to one good's price changes
In cases of perfectly inelastic demand or supply, what happens when there is a change in price?
Consumers continue to purchase the same amount regardless of the price change.
Which of the following is a factor affecting perfectly inelastic demand?
The good or service being a necessity with no close substitutes.
What does perfectly elastic demand imply?
Consumers are very sensitive to price changes.
Which of the following is a factor affecting perfectly inelastic supply?
No close substitutes for the good or service.
What happens when a good has perfectly elastic supply?
The quantity supplied varies significantly with any price change.
Which of the following is a factor that can influence perfectly elastic demand?
Consumers have complete knowledge about the product's characteristics and prices
If the demand for a product is perfectly inelastic, what is likely to happen when the price increases?
The quantity demanded will remain unchanged
What does a perfectly elastic supply imply?
A small change in price will result in a proportionally larger change in the quantity supplied
Which of the following is NOT a factor that can influence perfectly elastic supply?
Producers face significant barriers to entry or exit
What is a characteristic of a perfectly inelastic demand?
The quantity demanded remains unchanged regardless of price changes
Study Notes
Supply and Demand Elasticity
Price Elasticity of Demand
Price elasticity of demand measures the responsiveness of quantity demanded to changes in market prices. When the price elasticity is high (-1 < E > 1), it means consumers change their behavior more as a result of price changes, indicating a relatively greater response from consumers to price changes. This can lead to either increase or decrease in total revenue depending on whether the price rises or falls. On the other hand, if the price elasticity is low (E close to zero or |E| < 1), consumer behavior changes less with respect to price changes, implying that small price changes do not significantly impact sales.
Price Elasticity of Supply
The price elasticity of supply assesses the responsiveness of producers to price changes when determining how much they produce and sell. If the price elasticity of supply is very high (E >> 1), this indicates a large shift in supply due to changes in price, which may cause shortages or surpluses. Conversely, if the price elasticity of supply is very low (E<<1), there is only a small proportionate change in quantity supplied with respect to price changes.
Cross-Price Elasticity
Cross-price elasticity examines the relationship between different goods and services by measuring how one product's price changes affect the demand for another good or service. In this case, if goods are substitutes, an increase in the price of one will lead to an increase in the demand for the other; conversely, if they are complementary goods, a decrease in the price of one will boost the demand for the other and vice versa.
Perfectly Inelastic and Perfectly Elastic
In economics, two special cases of price elasticities are mentioned - perfectly inelastic or perfectly elastic demand. These concepts are utilised to analyze extreme situations where all buyers buy or none buy a certain product regardless of its price. For example, if a person needs oxygen to survive, they would continue buying it even if the price increases infinitely, making the demand perfectly inelastic (-∞ < E < 0). Alternatively, if a luxury item has become so expensive that nobody can afford it, the demand becomes perfectly elastic (E = ∞). Similarly, perfect inelasticity applies when a firm cannot reduce production below or above a fixed level despite any changes in price.
Learn about price elasticity of demand and supply, cross-price elasticity, as well as perfectly inelastic and perfectly elastic concepts. Explore how consumers and producers respond to price changes and how the demand for goods can be influenced by changes in prices of other products.
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