11.1 Price Elasticity of Demand Flashcards
If the coefficient of elasticity is zero, then the consumer demand for the product is said to be
A. Perfectly inelastic.
B. Perfectly elastic.
C. Unit inelastic.
D. Unit elastic.
A. Perfectly inelastic.
When the coefficient of elasticity (Percentage change in demand ÷ Change in price) is less than one, demand is inelastic. When the coefficient is zero, the demand is perfectly inelastic.
When the demand elasticity coefficient is greater than one, demand is
In a relatively elastic range. A small change in price results in a significant change in quantity demanded.
When the demand elasticity coefficient is equal to one, demand has
Unitary elasticity (usually a very limited range). A single-unit change in price brings about a single-unit change in quantity demanded.
When the demand elasticity coefficient is less than one, demand is
In a relatively inelastic range. A large change in price results in an insignificant change in quantity demanded.
When the demand elasticity coefficient is infinite, demand is
Perfectly elastic (depicted as a horizontal line). In pure competition, the number of firms is so great that one firm cannot influence the market price.
When the demand elasticity coefficient is equal to zero, demand is
Perfectly inelastic (depicted as a vertical line). Some consumers’ need for a certain product is so high that they will pay whatever price the market sets. The number of these consumers is limited and the amount they desire is relatively fixed.
The price elasticity of demand is most appropriately defined as the
A. Change in price in relation to quantity demanded.
B. Elastic response of price in relation to demand.
C. Change in demand in relation to a change in price.
D. Change in quantity demanded in relation to a change in price.
D. Change in quantity demanded in relation to a change in price.
The price elasticity of demand is most appropriately defined as the change in quantity demanded in relation to a change in price.
When a product has elastic demand, the percentage change in price
A. Results in an equal change in quantity demanded.
B. Results in no change in quantity demanded.
C. Is greater than the percentage change in quantity demanded.
D. Is less than the percentage change in quantity demanded.
D. Is less than the percentage change in quantity demanded.
The price elasticity of demand measures the sensitivity of the quantity demanded of a product to a change in its price. The formula for price elasticity of demand is Percentage change in quantity demanded ÷ Percentage change in price. When the result is a coefficient greater than 1.0, the product is said to have elastic demand. Thus, for a good with elastic demand, the percentage change in price must be less than the percentage change in quantity demanded.
As the price for a particular product changes, the quantity of the product demanded changes according to the following schedule:
Total Quantity Demanded / Price per Unit
100 / $50
150 / 45
200 / 40
225 / 35
230 / 30
232 / 25
The price elasticity of demand for this product when the price decreases from $50 to $45 is
A. 0.10
B. 3.80
C. 10.00
D. 0.20
B. 3.80
A product’s price elasticity of demand is measured as the percentage change in quantity demanded divided by the percentage change in price. When price falls from $50 to $45, the coefficient is 3.8, calculated as follows:
Ed = [(150 – 100) ÷ (150 + 100)] ÷ [($50 – $45) ÷ ($50 + $45)]
= (50 ÷ 250) ÷ ($5 ÷ $95)
= 20.0% ÷ 5.26%
= 3.8
In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic’s demand curve is best described as
A. Perfectly elastic.
B. Perfectly inelastic.
C. Relatively inelastic.
D. Relatively elastic
B. Perfectly inelastic.
When buyers have such a high need for a given product that they must pay whatever price sellers choose to charge and there are no suitable substitutes, demand is said to be perfectly inelastic. This is depicted graphically as a vertical line.
If the price of apples declines and total revenue received by the firm increases, the
A. Demand for apples is inelastic.
B. Elasticity of demand for apples is less than 1.0.
C. Demand for apples is elastic.
D. Elasticity of demand for apples is 1.0
C. Demand for apples is elastic.
A decline in price accompanied by an increase in total revenue indicates that quantity demanded has increased by a greater percentage than the percentage price decrease. Hence, the price elasticity of demand is greater than 1.0. Demand is elastic when it is greater than 1.0.
When a 5% fall in the price of velcro shoes causes the quantity demanded to increase by 10%, the demand for velcro shoes is said to be
A. Perfectly inelastic.
B. Unit elastic.
C. Relatively inelastic.
D. Relatively elastic.
D. Relatively elastic.
If the elasticity coefficient is greater than 1, demand is classified as relatively elastic. Since the percentage change in quantity demanded is 10% and the price change is 5%, the elasticity coefficient is 2.0 (10% ÷ 5%).
A company is analyzing demand at different price points for their premium writing pens. The quantity demanded was 1,500,000 units when the price was $4.50. When the price was $3.25, the quantity demanded was 2,250,000 units. Using the midpoint formula, the price elasticity of demand for its premium writing pens is
A. 0.86
B. 1.16
C. 0.63
D. 1.24
D. 1.24
The midpoint formula uses the average percentage change in both quantity and price. The quantity demanded was 2,250,000 units, which then dropped to 1,500,000 units for a difference of 750,000 units. To determine the average percentage, divide the 750,000 by 3,750,000 units (2,250,000 + 1,500,000) to get .2. Use the same formula for the price: $4.50 – $3.25 = $1.25. Divide the $1.25 by $7.75 ($4.50 + $3.25) to get .16129032. Lastly, divide the quantity ratio of .2 by the price ratio of .16129032 to get a price elasticity of 1.24, which indicates an elastic product.
A company noticed that they were losing business to other firms. In view of this, the company decided to change its monthly charges for its various telephone services as follows:
Previous Rate / New Rate
Call waiting $ 8 / $ 4
Caller ID 6 / 4
International calling 3 / 1
Internet access 15 / 13
In response to these price changes, the demand for the above services changed as follows:
Previous Demand / New Demand
Call waiting 100 / 150
Caller ID 50 / 70
International calling 30 / 40
Internet access 150 / 160
Using the midpoint method, the price elasticity of demand is the highest for
A. Internet access.
B. Call waiting.
C. International calling.
D. Caller ID.
D. Caller ID.
Price elasticity of demand measures the responsiveness of demand for a product to a change in price. The coefficient is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The point method uses this formula:
Ed = [(Q1-Q2) + (Q1 + Q2)] / [(P1 - P2) + (P1 + P2)]
By convention, elasticity of demand is reported as a positive number. Thus, the calculation for the caller ID is as follows:
Ed = [(70-50) + (70+50)] / [(4-6) + (4+6)]
= (20 + 120) / (2 + 10) = 0.167 / 0.200
= 0.833
A profit-maximizing company is considering a price increase on a particular product. After extensive market research, the company has determined that demand for the product is price inelastic. Assuming all other factors remain constant, determine what course of action the company should take and the resulting impact on quantity demanded.
A. Do not increase price; quantity demanded will decrease significantly.
B. Do not increase price; minimal impact on quantity demanded.
C. Increase price; minimal impact on quantity demanded.
D. Increase price; quantity demanded will increase significantly
C. Increase price; minimal impact on quantity demanded.
Elasticity is a measure of the sensitivity of consumer reaction to a change in the price of a good or service. Inelastic demand occurs when a large change in price result in a small change in quantity demanded. Thus, the company should increase price to maximize the profit, and the increased price will have minimal impact on quantity.
After completing a marketplace analysis of Product Z, a company’s accountant has determined that a price change from $25 to $20 will result in a demand increase for Product Z from 1,000 units to 1,500 units. Based on the information provided, what is the price elasticity of demand for Product Z using the midpoint formula?
A. 1.33
B. 2.50
C. 1.80
D. 0.56
C. 1.80
Price elasticity of demand measures the responsiveness of demand for a product to a change in price. The coefficient is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The calculation is as follows:
E = [(1,000 – 1,500) ÷ (1,000 + 1,500)] ÷ [($25 – $20) ÷ ($25 + $20)]
= (500 ÷ 2,500) ÷ ($5 ÷ $45)
= 0.2 ÷ 0.1111
= 1.8
If oil producers and retailers were to increase the price of gasoline for cars during the summer season by $.05 per gallon, these suppliers anticipate that the demand for gasoline
A. Responds as an inferior good.
B. Is relatively inelastic.
C. Is perfectly inelastic.
D. Is relatively elastic.
B. Is relatively inelastic.
An increase in gasoline prices during the summer implies that demand for gasoline is relatively price inelastic in the short run. That is, the price increase will result in little or no decline in the amount demanded, and total revenues will increase.
If a product has a price elasticity of demand of 2.0, the demand is said to be
A. Relatively inelastic.
B. Perfectly inelastic.
C. Perfectly elastic.
D. Relatively elastic.
D. Relatively elastic.
Elasticity is a measure of the sensitivity of consumer reaction to a change in the price of good or service. If price elasticity of demand is greater than 1, a certain percentage change in price will result in a greater percentage change in the quantity demanded. In this situation, demand is said to be relatively elastic.
If demand for a product is elastic, which one of the following would be true?
A. A decrease in price would increase total revenue.
B. An increase in price would be total revenue neutral.
C. A decrease in price would decrease total revenue.
D. An increase in price would increase total revenue
A. A decrease in price would increase total revenue.
If the demand elasticity is greater than one (i.e., demand for the product is elastic), a price decrease will cause an increase in total revenue because the demand increases by a greater percentage than the price decreases.
Which one of the following statements is the best definition of inelastic demand?
A. Product demand for which the percentage change in quantity demanded is less than the percentage change in price.
B. Product demand for which the percentage change in quantity demanded is greater than the percentage change in price.
C. Products where a consumer needs or wants only a limited amount, and demand decreases when the minimum is obtained.
D. Products where a consumer is more likely to continue to purchase, but demand is impacted by a limited product variety
A. Product demand for which the percentage change in quantity demanded is less than the percentage change in price.
Relatively inelastic demand occurs when a large change in price results in a small change in quantity demanded.
