Test: Elasticity - JAMB MCQ

The price elasticity of demand measures the responsiveness or sensitivity of the quantity demanded to changes in price. It helps us understand how much the quantity demanded of a good or service will change in response to a change in its price. A higher value of price elasticity of demand indicates a greater degree of responsiveness of quantity demanded to price changes.

If the price elasticity of demand for a product is greater than 1, it means that the demand is elastic. An elastic demand indicates that a small change in price leads to a relatively larger change in quantity demanded. Consumers are highly responsive to price changes, and small price decreases can lead to significant increases in quantity demanded, while small price increases can cause substantial decreases in quantity demanded.

Cross elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another related good. It helps us understand the relationship between two goods. A positive cross elasticity of demand indicates that the two goods are substitutes, meaning that an increase in the price of one good leads to an increase in the quantity demanded of the other good, and vice versa.

When the cross elasticity of demand is positive, it indicates that the goods are substitutes. Substitutes are goods that can be used in place of each other for a similar purpose. An increase in the price of one substitute good leads to an increase in the quantity demanded of the other substitute good.

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. It helps us understand how changes in income affect the demand for a particular good or service. If the income elasticity of demand is positive, it indicates a normal good, where an increase in income leads to an increase in the quantity demanded. If the income elasticity of demand is negative, it indicates an inferior good, where an increase in income leads to a decrease in the quantity demanded.

If the income elasticity of demand for a luxury good is greater than 1, it implies that the good is a normal good. A normal good is a good for which the quantity demanded increases as income increases. Luxury goods are often associated with higher income levels, and their demand tends to be more responsive to changes in income.

Advertising and promotion can influence the demand for a good or service, but they do not directly affect the price elasticity of demand. The price elasticity of demand is influenced by factors such as the availability of substitutes, the necessity of the good, and the time period under consideration. The availability of substitutes, the degree of necessity, and the length of the time period can all affect how responsive consumers are to changes in price.

The coefficient of price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. It provides a measure of the responsiveness of quantity demanded to changes in price. The formula for price elasticity of demand is (Percentage change in quantity demanded / Percentage change in price).

A price elasticity of demand value of 0.5 indicates that the demand is inelastic. Inelastic demand means that a change in price has a relatively smaller effect on the quantity demanded. When the price elasticity of demand is less than 1, it indicates inelastic demand.

The concept of elasticity is important for consumers because it helps them maximize their utility. By understanding the price elasticity of demand for different goods, consumers can make informed decisions about how to allocate their limited income to maximize their satisfaction or utility. Elasticity helps consumers understand how changes in price will affect their purchasing power and the relative importance of different goods in their consumption choices.