Explain why the number of substitutes influences the price elasticity of demand
What will be an ideal response?
The price elasticity of demand is a measure of how responsive the quantity demanded is to a change in price. If a good has many substitutes, it is easy to switch away from it when its price rises. Hence a rise in price will substantially decrease the quantity demanded. Similarly, when its price falls, consumers can switch into it and away from many other (substitute) products. Hence a fall in price will substantially increase the quantity demanded. Because changes in price have major effects on the quantity demanded, the demand is elastic.
You might also like to view...
When efficiency is attained, the consumer surplus
A) must be larger than the producer surplus. B) must be smaller than the producer surplus. C) must equal the producer surplus. D) can be either smaller than or larger than but cannot equal the producer surplus. E) can be smaller than, equal to, or larger than the producer surplus.
For a perfectly competitive rancher in Wyoming, if the price does not change, an economic profit could turn into an economic loss if the
A) average total cost curve shifts downward. B) average total cost curve does not change. C) average total cost curve shifts upward. D) marginal cost curve shifts downward. E) average fixed cost decreases.
If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)
A) 0.80 hryvnias per dollar B) 1.25 hryvnias per dollar C) 2.80 hryvnias per dollar D) 28 hryvnias per dollar
Compensating differentials for employees can be seen as one measure of adjusting for:
A. corporate tax evasion. B. surplus labor in the unorganized sector. C. high rates of inflation. D. problems of ethical conflict.