The Theory of Price Elasticity

Question 1

what is the theory of price elasticity

Answer 1

price elasticity falls AS price falls = price falls - quantity rises

Question 2

what are consumers sensitive too

Answer 2

consumers are not that price sensitive to relatively inexpensive goods but are sensitive expensive luxury goods

Question 3

Describe perfectly inelastic (coefficient, explanation and example)

Answer 3

Ed = 0
quantity demanded does not change with price = vertical curve
example = goods with no substitutes (heroin for drug addicts or insulin for diabetics)

Question 4

Describe relatively inelastic (coefficient, explanation and example)

Answer 4

Ed < 1
quantity demanded decreases by less than 1% = steep curve
example = goods with few close substitutes (petrol, beer, milk)

Question 5

Describe unitary elastic (coefficient, explanation and example)

Answer 5

Ed = 1
quantity demanded decreases by exactly 1% = equal proportion
example = goods with some close substitutes (uncommon)

Question 6

Describe relatively elastic (coefficient, explanation and example)

Answer 6

Ed > 1
quantity demanded decreases by more than 1% = almost flat
example = goods with many close substitutes (Cars, fast food)

Question 7

Describe perfectly elastic (coefficient, explanation and example)

Answer 7

Ed = infininty
quantity demanded decreases to 0 = horizontal curve
example = goods with perfect substitutes, if price increases by 1c consumers will swap product (pizza)