All Flashcards
What is the difference between elastic and inelastic demand in terms of consumer responsiveness?
Elastic demand means consumers are highly responsive to price changes, while inelastic demand means they are not very responsive.
Differentiate between perfectly elastic and perfectly inelastic demand.
Perfectly elastic demand means any price increase will cause quantity demanded to fall to zero, while perfectly inelastic demand means quantity demanded will not change regardless of price.
How does PED differ from the slope of the demand curve?
PED is based on percentage changes in price and quantity, while the slope is based on absolute changes. PED can vary along a straight-line demand curve, while the slope remains constant.
Compare the impact of a price increase on total revenue under elastic versus inelastic demand.
Under elastic demand, a price increase will decrease total revenue. Under inelastic demand, a price increase will increase total revenue.
How does PED relate to the short run versus the long run?
Demand tends to be more inelastic in the short run because consumers have less time to adjust their consumption habits. Demand tends to be more elastic in the long run as consumers find substitutes or change their behavior.
Compare the effect of a tax on goods with elastic versus inelastic demand.
A tax on goods with elastic demand will lead to a larger decrease in quantity demanded and less tax revenue compared to a tax on goods with inelastic demand.
How does PED relate to necessities versus luxuries?
Necessities tend to have inelastic demand, while luxuries tend to have elastic demand.
What is the difference between unit elastic and relatively elastic demand?
Unit elastic demand means the percentage change in quantity demanded equals the percentage change in price, while relatively elastic demand means the percentage change in quantity demanded is greater than the percentage change in price.
Compare the impact of a subsidy on consumer prices under elastic versus inelastic demand.
Under elastic demand, consumers will see a larger decrease in price from a subsidy. Under inelastic demand, consumers will see a smaller decrease in price.
How do PED and cross-price elasticity of demand differ?
PED measures the responsiveness of quantity demanded to a change in the price of the same good, while cross-price elasticity measures the responsiveness of quantity demanded to a change in the price of a related good (substitute or complement).
How does PED affect the effectiveness of a price ceiling?
If demand is inelastic, a price ceiling will have a smaller impact on quantity demanded and may not be very effective in addressing shortages.
How does PED influence the impact of a subsidy on consumer prices?
If demand is inelastic, consumers will see a smaller decrease in price from a subsidy compared to when demand is elastic.
What happens when the government imposes a tax on a good with elastic demand?
The quantity demanded will decrease significantly, and the government may not collect much tax revenue.
How does PED affect the success of policies aimed at reducing consumption of harmful goods?
If demand is inelastic, policies like taxes or regulations may be less effective in reducing consumption.
How does PED impact the effectiveness of agricultural price support programs?
If demand is inelastic, price supports can lead to large surpluses, as quantity demanded does not decrease much with higher prices.
What is the effect of a price floor on goods with elastic demand?
A price floor will lead to a large surplus, as the quantity demanded decreases significantly at the higher price.
How does PED relate to the effectiveness of advertising campaigns?
Advertising campaigns aim to make demand more inelastic, so that firms can raise prices without significantly reducing quantity demanded.
How does PED affect the welfare impact of trade policies?
The welfare impact of tariffs and quotas depends on the elasticity of demand and supply in the affected markets.
How does PED affect the impact of minimum wage laws?
If demand for labor is inelastic, minimum wage laws will have a smaller impact on employment than if demand is elastic.
How does PED influence the effectiveness of policies aimed at promoting energy conservation?
If demand for energy is inelastic, policies like carbon taxes may be less effective in reducing energy consumption.
How does PED relate to pricing decisions?
Firms use PED to determine whether raising prices will increase or decrease total revenue.
How does PED affect a firm's decision to offer discounts?
If demand is elastic, discounts can significantly increase quantity sold and overall revenue.
How does the availability of substitutes affect PED?
More substitutes generally lead to more elastic demand, as consumers can easily switch to alternatives if the price increases.
If demand is inelastic, what happens to total revenue when price increases?
Total revenue increases because the decrease in quantity demanded is proportionally smaller than the increase in price.
How does PED influence tax incidence?
If demand is more inelastic than supply, consumers bear a larger burden of the tax. If demand is more elastic than supply, producers bear a larger burden.
How does PED affect the impact of a supply shock on price?
If demand is inelastic, a supply shock will lead to a larger change in price than if demand is elastic.
How does PED relate to luxury goods?
Luxury goods typically have more elastic demand because they are not necessities and consumers can easily forgo them if prices rise.
How does PED relate to essential goods?
Essential goods tend to have inelastic demand because consumers need them regardless of price changes.
How can businesses use PED to forecast sales?
By understanding the PED of their products, businesses can predict how changes in price will affect the quantity they sell.
How does PED affect government revenue from excise taxes?
If demand is inelastic, the government can raise more revenue from excise taxes without significantly reducing the quantity demanded.