which of the following is explained by the price elasticity of demand? course hero

Why is the price elasticity of demand always less than or equal to zero?

The price elasticity of demand will always be less than or equal to zero because of the inverse relationship between price paid and quantity demanded. An absolute value is used when calculating the price elasticity of demand because it is a measurement of the amount (or the "size") of the responsiveness.

When does the absolute value of the price elasticity of demand equal to 1?

This is a unit elastic demand. This occurs only when the percentage change in quantity demanded is equal to the percentage change in price.

What is the fourth determinant of price elasticity?

The fourth determinant of the price elasticity of demand is how broadly the market is defined. This is somewhat related to the availability of substitutes. For example, the demand for ice cream in general is less elastic than the demand for a particular brand of ice cream. Many different brands of ice cream are available. Therefore, consumers will respond more to a change in the price of a specific brand than they will to a change in the overall price of ice cream. The broader the definition of the market, the less elastic demand will be.

How to explain perfectly inelastic demand?

Perfectly inelastic demand occurs when demand does not change in response to changes in price, i.e., when the price elasticity of demand is equal to zero. Here, the percentage change in quantity demanded is equal to zero, no matter how price changes. In other words, the quantity demanded does not change when the price changes, and the demand curve for the good is vertical. For perfectly inelastic demand to occur, the good or service must be a necessity and have no substitutes. For example, consumers do not purchase more dental cavity fillings if the price falls or forgo treatment if the price rises.

How does elastic demand work?

This idea reflects a perfectly elastic demand, in which any increase in price will cause demand to fall to zero. Perfectly elastic demand occurs when the price elasticity of demand is equal to infinity. In this case, consumers respond to any price increase by no longer purchasing the good; the quantity demanded falls to zero. When demand is perfectly elastic, the demand curve is horizontal . Perfectly elastic demand occurs when a large number of identical substitutes (for example, there are over a dozen brands of sugar) are available in a market. If a seller raises the price of one product, consumers can simply switch to an identical version of the good from a different seller, and the quantity demanded from the first seller falls to zero.

What is the price elasticity of demand?

The price elasticity of demand measures consumers' responsiveness to price changes; it measures how much the quantity demanded for a good adjusts when there is a change in the good's price.

What are the factors that determine whether a consumer is responsive to price changes?

There are five primary factors that determine whether consumers are responsive (elastic) or insensitive (inelastic) to price changes: the number of substitutes available, whether the good is a necessity or a luxury, the time frame considered, how broadly the market is defined, and the proportion of a consumer's budget accounted for by the good.