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FAQs on Elasticity of demand - Microeconomics - Economics Class 11 - Commerce
| 1. What is elasticity of demand in microeconomics? |  |
Ans. Elasticity of demand refers to the responsiveness of the quantity demanded of a product to a change in its price. It measures the degree to which the demand for a product will change when its price changes. It is an important concept in microeconomics as it helps businesses and policymakers understand how sensitive consumers are to changes in price.
| 2. How is elasticity of demand calculated? | |
Ans. Elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The formula for price elasticity of demand is:
Elasticity of Demand = (Percentage Change in Quantity Demanded / Percentage Change in Price)
If the elasticity is greater than 1, it is considered elastic, indicating that the product is sensitive to price changes. If the elasticity is less than 1, it is considered inelastic, suggesting that the demand for the product is not very responsive to price changes.
| 3. What factors affect the elasticity of demand? | |
Ans. Several factors affect the elasticity of demand. These include the availability of substitutes, the necessity of the product, the proportion of income spent on the product, and the time period considered. If there are many substitutes available, consumers are more likely to switch to other products if the price changes, making the demand more elastic. Products that are considered necessities, such as food and medicine, tend to have inelastic demand as consumers are less likely to reduce their consumption even if the price increases.
| 4. How does elasticity of demand impact pricing decisions? | |
Ans. The elasticity of demand plays a crucial role in pricing decisions for businesses. If the demand for a product is elastic, meaning that consumers are highly responsive to price changes, businesses need to be cautious when increasing the price as it could lead to a significant decrease in demand. On the other hand, if the demand is inelastic, businesses have more flexibility in setting higher prices as consumers are less likely to reduce their purchases. Understanding the elasticity of demand helps businesses optimize their pricing strategies to maximize profits.
| 5. How does elasticity of demand influence government policies? | |
Ans. The elasticity of demand influences government policies, particularly in areas such as taxation and subsidies. If the demand for a product is elastic, a higher tax rate on that product may lead to a significant decrease in its demand, potentially reducing tax revenue. In contrast, if the demand is inelastic, a higher tax rate may not have a significant impact on demand, allowing the government to generate more tax revenue. Similarly, subsidies are often provided for products with elastic demand to stimulate consumption and support industries. Understanding the elasticity of demand helps policymakers design effective tax and subsidy policies.
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