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FAQs on Ch.5 Elasticity of Demand - Commerce

1. What is elasticity of demand?
Ans. Elasticity of demand refers to the responsiveness of quantity demanded to a change in price. It measures how sensitive the demand for a particular good or service is to price changes.
2. How is the elasticity of demand calculated?
Ans. The elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This formula is represented as: Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price).
3. What does it mean when demand is elastic?
Ans. When demand is elastic, it means that a small change in price leads to a proportionately larger change in quantity demanded. In other words, consumers are very responsive to price changes, and a slight decrease in price can significantly increase the quantity demanded.
4. What factors determine the elasticity of demand?
Ans. The elasticity of demand is influenced by several factors, including the availability of substitutes, the necessity of the good or service, the proportion of income spent on the good, and the time period under consideration. Goods with close substitutes, luxury items, a small proportion of income spent, and longer time periods tend to have more elastic demand.
5. How does elasticity of demand affect pricing decisions?
Ans. The elasticity of demand plays a crucial role in pricing decisions. When demand is elastic, a decrease in price can lead to a significant increase in quantity demanded, resulting in higher total revenue. On the other hand, when demand is inelastic, price changes have a minimal impact on quantity demanded, and firms may choose to increase prices to maximize revenue. Understanding elasticity helps businesses determine the optimal pricing strategy for their products or services.
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