LS12 - Price Elasticity of Demand

Question 1

What is price elasticity of demand?

Answer 1

Price elasticity of demand measures the responsiveness of demand given a change in price

Question 2

When is demand price elastic?

Answer 2

Demand is said to be price elastic when a change in price causes a proportionately larger change in demand

Question 3

When is demand price inelastic?

Answer 3

If a change in price causes a proportionately smaller change in demand, demand Is said to be price inelastic

Question 4

How do the number of substitutes affect the price elasticity of demand?

Answer 4

The more substitutes a product has, the greater degree of consumer switching will take place when there is a price change
Greater substitute goods leads to elastic demand whereas fewer substitute goods leads to inelastic demand

Question 5

How does necessity/luxury affect the price elasticity of demand?

Answer 5

If a product is considered a necessity, demand is likely to be price inelastic as people require the product no matter what the price is. If it is a luxury, it is not necessary, so demand could change more dependant on price

Question 6

How does addictiveness affect the price elasticity of demand?

Answer 6

The more addictive a product is, the more price inelastic demand will be. This is because it becomes more of a necessity rather than a luxury

Question 7

How does time affect the price elasticity of demand?

Answer 7

Time gives consumers the opportunity to find alternatives. Therefore, the greater the time period, the more price elastic demand will be

Question 8

How does the proportion of income on the product affect the price elasticity of demand?

Answer 8

The greater the proportion of income spent on a product, the less capable consumers will be to afford any price increases. Therefore, the greater the proportion of income spent on a product, the more price inelastic demand will be

Question 9

What is demand?

Answer 9

Demand is the total quantity of goods and services purchased at a given price over a given period of time

Question 10

What is derived demand?

Answer 10

Derived demand is the demand for a good or service that results from the demand of another good or service

Question 11

What is effective demand?

Answer 11

Effective demand is the purchase of goods that consumers are actually willing and able to buy

Question 12

What is joint demand?

Answer 12

Joint demand refers to a situation where the demand for one product or service generates demand for another related product or service. An example are complementary goods

Question 13

What is composite demand?

Answer 13

Composite demand is the demand for a good or service that has multiple uses

Question 14

What is the formula for price elasticity of demand?

Answer 14

Price elasticity of demand === % change in quantity demand/// % change in price

Question 15

What is the formula for the percentage change of price and quantity?

Answer 15

New - Original///Original * 100 = Percentage change

Question 16

What important rule must be ensured when answering a price elasticity of demand question?

Answer 16

It is always to 2 decimal places

Question 17

What is the price elasticity of demand if it is under 1?

Answer 17

Inelastic

Question 18

If the price elasticity of demand is 1 what is the elasticity?

Answer 18

The elasticity is in unitary

Question 19

What is the price elasticity of demand if it is greater than 1?

Answer 19

Elastic

Question 20

What does it mean if a market is in unitary?

Answer 20

This means a change in price is equal to a change in quantity demanded. Therefore, total revenue is constant

Question 21

Where is the elastic, inelastic, and unitary part of the aggregate demand curve?

Answer 21

Unitary is found at the middle of the curve
Elastic demand is found below the unitary point
Inelastic demand is found above the unitary point

Question 22

What is the price elasticity of demand if it is infinite?

Answer 22

Perfectly Elastic

Question 23

What is the price elasticity of demand if it is 0?

Answer 23

Perfectly Inelastic

Question 24

What does it mean if a market is has perfectly inelastic demand?

Answer 24

This is where the quantity demanded of a good does not change in response to a change in price. This leads to a vertical line. An example is life-saving medication in which the demand would remain no matter the cost

Question 25

What does it mean if a market is has perfectly elastic demand?

Answer 25

This is where the quantity demanded of a good changes infinitely with any change in price. This leads to a horizontal line. This can occur in a competitive market where an increase in price leads to all consumers switching to a substitute