Quantitative Demand Analysis

Question 1

Introduction to Demand Analysis

What does an increase in the price of a good lead to in terms of quantity demanded?

Answer 1

• An increase in the price of a good leads to a decline in the quantity demanded for that good.

Question 2

Elasticity Concept

What does elasticity measure?
.

Answer 2

Elasticity measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable

Question 3

Total Revenue Test

What happens to total revenue when demand is elastic and the price increases?

Answer 3

When demand is elastic, a price increase leads to a decrease in total revenue.

Question 4

Factors Affecting Own Price Elasticity

How does the availability of substitutes affect the own price elasticity of demand?

Answer 4

The more substitutes available for a good, the more elastic the demand for it.

Question 5

Time/Duration of Purchase Horizon

How does the time consumers have to react to a price change affect demand elasticity?

Answer 5

The more time consumers have to react to a price change, the more elastic the demand for the good.

Question 6

Expenditure Share of Consumers’ Budgets

How does the expenditure share of a good in consumers’ budgets affect its price elasticity?

Answer 6

Essential goods are generally inelastic, while nonessential goods are generally elastic.

Question 7

Income Elasticity

What does income elasticity measure?

Answer 7

It measures the responsiveness of a percent change in demand for a good due to a percent change in income.

Question 8

Regression Analysis

What can regression analysis be used to estimate? (3)

Answer 8

Regression analysis can be used to estimate:

• demand functions,
• elasticities,
• other important economic relationships.