Price Elasticity of Demand - AP Microeconomics
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What is perfectly elastic demand?
What is perfectly elastic demand?
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Quantity demanded is infinite at a specific price. Elasticity is infinite; horizontal demand curve.
Quantity demanded is infinite at a specific price. Elasticity is infinite; horizontal demand curve.
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Name an example of a good with inelastic demand.
Name an example of a good with inelastic demand.
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Essential goods like insulin. Life-saving medicines with no close substitutes.
Essential goods like insulin. Life-saving medicines with no close substitutes.
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Find the effect on revenue if demand is elastic and price increases.
Find the effect on revenue if demand is elastic and price increases.
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Revenue decreases. Higher price reduces quantity more than proportionally.
Revenue decreases. Higher price reduces quantity more than proportionally.
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Find the effect on revenue if demand is inelastic and price decreases.
Find the effect on revenue if demand is inelastic and price decreases.
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Revenue decreases. Lower price increases quantity less than proportionally.
Revenue decreases. Lower price increases quantity less than proportionally.
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What is the elasticity of a luxury good likely to be?
What is the elasticity of a luxury good likely to be?
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Elastic. Non-essential goods typically have many substitutes.
Elastic. Non-essential goods typically have many substitutes.
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Identify the elasticity if $E_d = 1$.
Identify the elasticity if $E_d = 1$.
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Demand is unitary elastic. Since $|1| = 1$, equal proportional response.
Demand is unitary elastic. Since $|1| = 1$, equal proportional response.
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What is perfectly inelastic demand?
What is perfectly inelastic demand?
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Quantity demanded does not change as price changes. Elasticity equals zero; vertical demand curve.
Quantity demanded does not change as price changes. Elasticity equals zero; vertical demand curve.
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Define price elasticity of demand.
Define price elasticity of demand.
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The responsiveness of quantity demanded to a change in price. Measures how sensitive consumers are to price changes.
The responsiveness of quantity demanded to a change in price. Measures how sensitive consumers are to price changes.
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Identify the elasticity if $E_d = 0.5$.
Identify the elasticity if $E_d = 0.5$.
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Demand is inelastic. Since $|0.5| < 1$, demand responds weakly to price.
Demand is inelastic. Since $|0.5| < 1$, demand responds weakly to price.
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Find the effect on revenue if demand is unitary elastic and price changes.
Find the effect on revenue if demand is unitary elastic and price changes.
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Revenue remains unchanged. Price and quantity effects exactly offset each other.
Revenue remains unchanged. Price and quantity effects exactly offset each other.
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State the midpoint formula for elasticity.
State the midpoint formula for elasticity.
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$E_d = \frac{(Q_2 - Q_1)/(Q_2 + Q_1)}{(P_2 - P_1)/(P_2 + P_1)}$. Uses average values to avoid endpoint bias.
$E_d = \frac{(Q_2 - Q_1)/(Q_2 + Q_1)}{(P_2 - P_1)/(P_2 + P_1)}$. Uses average values to avoid endpoint bias.
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State the midpoint formula for elasticity.
State the midpoint formula for elasticity.
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$E_d = \frac{(Q_2 - Q_1)/(Q_2 + Q_1)}{(P_2 - P_1)/(P_2 + P_1)}$. Uses average values to avoid endpoint bias.
$E_d = \frac{(Q_2 - Q_1)/(Q_2 + Q_1)}{(P_2 - P_1)/(P_2 + P_1)}$. Uses average values to avoid endpoint bias.
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How does the proportion of income spent on a good affect elasticity?
How does the proportion of income spent on a good affect elasticity?
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Higher proportion leads to more elastic demand. Larger budget share makes price changes more noticeable.
Higher proportion leads to more elastic demand. Larger budget share makes price changes more noticeable.
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What happens to total revenue when demand is elastic and price decreases?
What happens to total revenue when demand is elastic and price decreases?
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Total revenue increases. Lower price with elastic demand boosts total revenue.
Total revenue increases. Lower price with elastic demand boosts total revenue.
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What is the elasticity of a necessity likely to be?
What is the elasticity of a necessity likely to be?
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Inelastic. Essential goods typically have few substitutes.
Inelastic. Essential goods typically have few substitutes.
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What does it mean if demand is inelastic?
What does it mean if demand is inelastic?
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Inelastic demand means $|E_d| < 1$. Quantity changes less than proportionally to price.
Inelastic demand means $|E_d| < 1$. Quantity changes less than proportionally to price.
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What does it mean if demand is elastic?
What does it mean if demand is elastic?
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Elastic demand means $|E_d| > 1$. Quantity changes more than proportionally to price.
Elastic demand means $|E_d| > 1$. Quantity changes more than proportionally to price.
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Identify the elasticity if $E_d = 1.5$.
Identify the elasticity if $E_d = 1.5$.
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Demand is elastic. Since $|1.5| > 1$, demand responds strongly to price.
Demand is elastic. Since $|1.5| > 1$, demand responds strongly to price.
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What is a determinant of price elasticity of demand?
What is a determinant of price elasticity of demand?
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Availability of substitutes. More substitutes make demand more responsive to price.
Availability of substitutes. More substitutes make demand more responsive to price.
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How does necessity affect price elasticity?
How does necessity affect price elasticity?
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Necessities tend to have inelastic demand. People cannot easily reduce consumption of essentials.
Necessities tend to have inelastic demand. People cannot easily reduce consumption of essentials.
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How does time horizon affect elasticity?
How does time horizon affect elasticity?
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Demand is more elastic over longer time horizons. More time allows consumers to find alternatives.
Demand is more elastic over longer time horizons. More time allows consumers to find alternatives.
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Calculate elasticity: Price decreases 10%, quantity increases 20%.
Calculate elasticity: Price decreases 10%, quantity increases 20%.
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$E_d = 2$ (elastic). Calculated as $\frac{20%}{10%} = 2$.
$E_d = 2$ (elastic). Calculated as $\frac{20%}{10%} = 2$.
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Calculate elasticity: Price increases 5%, quantity decreases 2%.
Calculate elasticity: Price increases 5%, quantity decreases 2%.
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$E_d = 0.4$ (inelastic). Calculated as $\frac{2%}{5%} = 0.4$.
$E_d = 0.4$ (inelastic). Calculated as $\frac{2%}{5%} = 0.4$.
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Name an example of a good with elastic demand.
Name an example of a good with elastic demand.
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Luxury goods like high-end cars. Non-essential items with many substitutes available.
Luxury goods like high-end cars. Non-essential items with many substitutes available.
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What is the elasticity of a necessity likely to be?
What is the elasticity of a necessity likely to be?
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Inelastic. Essential goods typically have few substitutes.
Inelastic. Essential goods typically have few substitutes.
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Is a good with many close substitutes likely to have elastic or inelastic demand?
Is a good with many close substitutes likely to have elastic or inelastic demand?
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Elastic demand. Substitutes make consumers highly price-sensitive.
Elastic demand. Substitutes make consumers highly price-sensitive.
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What happens to total revenue when demand is elastic and price decreases?
What happens to total revenue when demand is elastic and price decreases?
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Total revenue increases. Lower price with elastic demand boosts total revenue.
Total revenue increases. Lower price with elastic demand boosts total revenue.
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What happens to total revenue when demand is inelastic and price increases?
What happens to total revenue when demand is inelastic and price increases?
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Total revenue increases. Higher price with inelastic demand boosts total revenue.
Total revenue increases. Higher price with inelastic demand boosts total revenue.
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What does a perfectly inelastic demand curve look like?
What does a perfectly inelastic demand curve look like?
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It is vertical. Straight vertical line showing zero price responsiveness.
It is vertical. Straight vertical line showing zero price responsiveness.
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What happens to elasticity as more substitutes become available?
What happens to elasticity as more substitutes become available?
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Elasticity increases. More options make consumers more price-sensitive.
Elasticity increases. More options make consumers more price-sensitive.
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