Why is elasticity of demand greater for goods that are a large share of a consumer’s budget?
Answer
Because the high cost of such goods relative to other goods makes consumers to pay more attention to their purchase, and seek substitutes whenever the price changes slightly.
Explanation
Among the many factors that influence elasticity of demand for a product is the proportion of the purchaser’s budget that is consumed by the item. When an item takes large share of the budget, the consumer tends to pay more attention to the purchase of such items, and hence seeking possible substitutes that are less expensive. Thus, whenever the price of such goods increase slightly, consumers are more concerned with their demand for the product and are highly likely to demand close substitutes or reduction in their demand for the product.
Revision
How is total revenue related to elasticity of demand?
- If total revenue increases as price decreases then demand is elastic.
Why are elastic goods and services said to be price sensitive?
- Changes in the price of such goods lead to a relatively change in quantity demanded.
What are the factors that affect elasticity of demand and how does it each affect elasticity?
- Substitutes, proportion of income, and necessities versus luxuries. The greater number of substitute goods; the greater the portion used to purchase the product; the more a good or services is considered a luxury the more elastic the demand is.
What are the factors that determine elasticity? Explain why utilities companies never offer sales prices on their services.
- There are few or no substitutes for the necessary services offered by utilities companies.
Inelastic demand
- A situation in which an increase or a decrease in price will not significantly affect demand for the product (less than 1); ex. milk
A product that is not narrowly defined is less elastic than a product that is.
- Consider two goods, Reebok sneakers and footwear. Reeboks would be considered “narrowly defined’, has many substitutes and this is more elastic than footwear, which has no substitutes and is therefore less elastic.
What will be the effect on the total revenue of a lower price on an elastic product?
- Revenue will increase.
Since price and quantity demanded are inversely related,
- the price elasticity of demand coefficient would always be a negative number.
Gasoline and milk are products that exhibit relatively price ______ demand?
- Gasoline and milk are products that exhibit relatively price inselastic demand.
Explain why the price elasticity of demand for most farm products is relatively price inelastic.
- The price elasticity of demand form most farm products is relatively price inelastic because consumers are not very responsive to changes in price for farm products. Increases in supply of farm products tends to depress prices causing quantity demanded to rise very little; As a result, total revenues and farmers’ incomes fall.
What type of demand occurs when there is a relatively large percentage change in quantity divided by a relatively smaller percentage change in price?
- Elastic demand.
There is ambiguity of a minus sign with the coefficient for the price elasticity of DEMAND.
- The result will be the same whether or not we take the absolute value of the coefficient for the price elasticity of SUPPLY.
If the price elasticity of demand is inelastic, the quantity demanded changes by a/n ______ percentage than does price.
- If the price elasticity of demand is inelastic, the quantity demanded changes by a/n smaller percentage than does price.
The shape or slop of a demand curve, its flatness or steepness, is not a sound basis for judging elasticity because:
- The shape or slop of a demand curve, its flatness or steepness, is not a sound basis for judging elasticity because the slope of a demand curve is computed from absolute changes in price and quantity.
When price and total revenue move in the same direction, demand is relatively inelastic.
- True: when price and total revenue move in the same direction, demand is relatively inelastic.
Why will the price elasticity of demand will be greater when the price of a good is higher relative to a consumer’s income.
- A higher priced good will have a higher price elasticity of demand.
In the absence of government subsidies, what tends to happen to the incomes of farmers when there are increases in the output of farm products?
- In the absence of government subsidies the incomes of farmers tends to go down.
The immediate market period is the period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in the quantity supplied.
- In the market period, a producer brings his entire output to market and must sell his products at the going price, even if that price is below the anticipated market price. Think of a farmer with perishable product. The short-run is too short to change plan capacity, but long enough to use the fixed-plant size more or less intensively using variable inputs.
What is the impact of a decrease in price on total revenue when demand is inelastic?
- When demand is inelastic, a decrease in price will decrease total revenue.
Unit price elasticity of demand results from what?
- Unit elasticity results if the loss in revenue from a lower price is exactly offset by the gain in revenue from the increase in sales.
Regardless of the degree of elasticity, price and total revenue always move together in the same direction when…
- Regardless of the degree of elasticity, price and total revenue always move together in the same direction when discussing the price elasticity of supply.
The short run is defined as…
- The short run is defined as the period in which neither any new firms can enter and industry nor existing firms may leave the industry.
When the time period under consideration is longer, product demand is generally more _______.
- When the time period under consideration is longer, product demand is generally more elastic.
Increases in demand have greatly increased the price of antiques because of _________.
- Increases in demand have greatly increased the price of antiques because of limited supply.
If demand is relatively price ______, a decrease in price will increase total revenue.
- If demand is relatively price elastic, a decrease in price will increase total revenue.
When the price elasticity of demand for a product is ________ __________, a small decrease in price causes buyers to increase their purchases from zero to all they can obtain.
- When the price elasticity of demand for a product is perfectly elastic, a small decrease in price causes buyers to increase their purchases from zero to all they can obtain.
Consumers often need time to adjust to changes in prices.
- True
The size of a plant is not variable in the short run.
- True
How in/elastic is the price elasticity of supply in the overall market for antiques and other collectibles.
- The price elasticity of supply for the overall market for antiques and other collectibles is relatively inelastic. On the other hand, the price elasticity of supply is relatively inelastic because higher prices may prompt the discovery of these goods, but only in small quantities, if at all. One the other hand, the market for “one-f-a-kind” antiques would be perfectly inelastic.
True or false: The midpoint formula averages the two prices and the two quantities as the reference points for computing the price elasticity of demand.
- True
What reasons explain the high prices of antiques?
- Reasons that explain the high prices of antiques include relatively inelastic supply, strong demand, and limited supply.
The proportion of income allocated to a particular product is a determinant of the price elasticity of demand.
- Other things equal, the higher the price of a good relative to consumers’ incomes, the greater the price-elasticity of demand and vice versa
An increase in price when a product is relatively price elastic will not result in an increase in total revenue.
- It will result in a decrease in total revenue because the percentage change in quantity demanded will exceed the percentage change in price due to consumer sensitivity to higher prices.
What type of demand is represented by a small change in price that leads to a large change in the quantity demanded?
- Elastic demand is represented by a small change in price that leads to a large change in the quantity demanded?
In the market period, supply is perfectly _________, illustrated as a vertical line.
- In the market period, supply is perfectly inelastic, illustrated as a vertical line. The market period is too short of a period in time in which firms are unable to adjust their production capacity in response to changes in the price of their goods and services. Therefore, the price elasticity of supply for goods and services in the very short-run or market period, is perfectly inelastic.
The elasticity of a Snickers candy bar contrasted with tooth repair and salt will be price _____.
- The elasticity of a Snickers candy bar contrasted with tooth repair and salt will be price elastic.
Lowering the price of a product along the elastic range of demand will ______ revenue.
- Lowering the price of a product along the elastic range of demand increase revenue.
When a small change in price causes quantity demanded to increase from zero to all that buyers can obtain, the price elasticity of demand is considered:
- When a small change in price causes quantity demanded to increase from zero to all that buyers can obtain, the price elasticity of demand is considered perfectly elastic.
