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Mind Map: Law of Demand and Elasticity of Demand | Business Economics for CA Foundation PDF Download

Mind Map: Law of Demand and Elasticity of Demand | Business Economics for CA Foundation
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FAQs on Mind Map: Law of Demand and Elasticity of Demand - Business Economics for CA Foundation

1. What is the Law of Demand and how does it function in the market?
Ans. The Law of Demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded by consumers increases, and conversely, as the price increases, the quantity demanded decreases. This relationship illustrates the inverse correlation between price and quantity demanded, which is fundamental in market economics.
2. What factors can cause a shift in the demand curve?
Ans. Several factors can cause the demand curve to shift, including changes in consumer income, preferences, the prices of related goods (substitutes and complements), and expectations about future prices. For instance, if consumer income increases, the demand for normal goods will typically rise, shifting the demand curve to the right.
3. How is elasticity of demand defined and what are its types?
Ans. Elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. There are several types of elasticity: price elasticity of demand, which assesses the responsiveness to price changes; income elasticity of demand, which measures how demand changes as consumer income changes; and cross-price elasticity of demand, which evaluates how the demand for one good changes in response to the price change of another good.
4. What is the significance of price elasticity of demand for businesses?
Ans. Price elasticity of demand is significant for businesses as it helps them understand how changes in pricing can impact total revenue. If demand is elastic, a price decrease can lead to an increase in total revenue, while if demand is inelastic, a price increase can boost total revenue. This information is crucial for pricing strategies and maximizing profits.
5. Can you explain the concept of inelastic demand with an example?
Ans. Inelastic demand refers to a situation where the quantity demanded changes very little in response to price changes. An example of inelastic demand is essential goods like salt or insulin, where even significant price increases do not substantially reduce the quantity demanded, as consumers need these items regardless of price fluctuations.
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