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Consider the following statements with respect to Price-elasticity of demand:
1. It is the measure of the responsiveness of the demand for a good to changes in its price.
2. The demand for luxury items is generally inelastic.
1. It is the measure of the responsiveness of the demand for a good to changes in its price.
2. The demand for luxury items is generally inelastic.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Verified Answer
Consider the following statements with respect to Price-elasticity of ...
Price-elasticity of demand is a measure of the responsiveness of the demand for a good to changes in itsprice. Demands for some goods are very responsive to price changes while demands for certain others arenot so responsive to price changes. Hence, statement 1 is correct.
- Price-elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. Price elasticity of demand for a good.
- Higher price elasticity of demand suggests that consumers are more responsive to a product's pricechange. If the price elasticity of demand is greater than 1, it is elastic. That is, demand for the product issensitive to an increase in price.
- Price elasticity of demand that is less than 1 is inelastic. Demand for the product does not change significantly after a price increase.
- If at some price, the percentage change in demand for a good is equal to the percentage change in theprice, |eD|= 1, and demand for the good is said to be unitary elastic at that price.
- The price elasticity of demand for a good depends on the nature of the good and the availability of closesubstitutes of the good. Consider, for example, necessities like food. Such goods are essential for life andthe demands for such goods do not change much in response to changes in their prices. Demand for food does not change much even if food prices go up. On the other hand, the demand for luxuries can be veryresponsive to price changes. In general, demand for necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic. Hence, statement 2 is not correct.
- Though the demand for food is inelastic, the demands for specific food items are likely to be more elastic. For example, think of a particular variety of pulses. If the price of this variety of pulses goes up, peoplecan shift to some other variety of pulses which is a close substitute. The demand for a good is likely to beelastic if close substitutes are easily available. On the other hand, if close substitutes are not availableeasily, the demand for a good is likely to be inelastic.
Most Upvoted Answer
Consider the following statements with respect to Price-elasticity of ...
Explanation:
1. Price-elasticity of demand:
Price-elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A higher price-elasticity of demand indicates that the demand for a good is more responsive to changes in price.
2. Demand for luxury items:
The demand for luxury items is generally inelastic. This means that changes in price do not have a significant impact on the quantity demanded of luxury goods. Consumers who purchase luxury items are usually less sensitive to price changes because they are willing to pay a higher price for the perceived value or status associated with luxury goods.
Therefore, the correct answer is option 'A' which states that only statement 1 is correct.
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