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Types of Elasticity of Demand Video Lecture | Business Economics for CA Foundation

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FAQs on Types of Elasticity of Demand Video Lecture - Business Economics for CA Foundation

1. What is elasticity of demand and why is it important in economics?
Ans. Elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is important in economics because it helps us understand how consumers react to price changes and how sensitive they are to these changes. This knowledge is crucial for businesses and policymakers in making decisions related to pricing, production, and taxation.
2. What are the different types of elasticity of demand?
Ans. There are five main types of elasticity of demand: price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, advertising elasticity of demand, and time elasticity of demand. Each type measures the responsiveness of demand to different factors such as price, income, substitute prices, advertising expenditure, and time, respectively.
3. How is price elasticity of demand calculated?
Ans. Price 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: Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price) If the result is greater than 1, demand is considered elastic, indicating that quantity demanded is highly responsive to price changes. If it is less than 1, demand is considered inelastic, meaning quantity demanded is not very responsive to price changes.
4. What factors influence the price elasticity of demand?
Ans. There are several factors that influence the price elasticity of demand. Some of the key factors include the availability of substitutes, the necessity of the good or service, the proportion of income spent on the good, time period under consideration, and the habit-forming nature of the good. Goods with close substitutes, luxury items, goods that consume a large portion of income, goods with longer time periods, and addictive goods tend to have higher price elasticities of demand.
5. How does elasticity of demand affect revenue for a business?
Ans. Elasticity of demand has a significant impact on a business's revenue. When demand is elastic (price elasticity of demand is greater than 1), a decrease in price leads to a proportionally larger increase in quantity demanded, resulting in an overall increase in revenue. On the other hand, when demand is inelastic (price elasticity of demand is less than 1), a decrease in price leads to a proportionally smaller increase in quantity demanded, resulting in a decrease in revenue. Therefore, businesses need to understand the elasticity of demand for their products in order to make pricing decisions that maximize their revenue.
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