Elasticity of demand describes how demand for a product responds

Elasticity of demand describes how demand for a product responds to changes in the price of that product. The formula for elasticity is percentage change in quantity demanded over percentage change in price. If the absolute value of the resulting figure is greater than one, the product is elastic; if it is less than one, the product is termed inelastic.

Elasticity determines how a product will react to a price change. If a product is elastic, reducing the price will result in greater total revenue, and increasing the price will result in reduced total revenues. Conversely, if a product is inelastic, reducing the price will reduce revenues and increasing the price will increase revenues. Knowing the elasticity of demand for a product tells the manufacturer whether a price decrease will hurt or help income.

Items that people must have tend to be inelastic. If you need open-heart surgery, you are not likely to decide against it because the price increases. Similarly, gasoline
is inelastic in the short run. People don't stop driving to work because the price of gasoline rises; nor do they drive more because of short-term price declines. Gasoline can become elastic in the long run as people switch to more fuel-efficient vehicles or communities respond with improved public transportation. Elastic items tend to be luxuries rather than necessities. Vacations, jewelry, and entertainment expenses are easily cut when prices rise. Airlines take advantage of the elasticity of pricing when they offer exceptionally low prices to vacation destinations.

For most items, as the price goes up, people buy less. Two categories cloud the situation: Giffen goods and Veblen goods. Giffen goods are low-priced, necessary products for which the demand increases as prices increase, such as basic food starches. At very low income levels, bread, rice or pasta may be central to a family's diet. If those prices increase dramatically, a family that doesn't have more disposable income to devote to food, and can't find substitute products at a lower price, may replace costlier goods such as meat and vegetables with these products.

Unlike Giffen goods, Veblen goods are branded, high- priced luxury items such as watches, sports cars, or high-end consumer electronics. For luxury items, lowering the price may actually harm the image and reduce demand. Where purchasers or Giffen goods are forced to buy more because they can't afford higher priced items, purchasers of Veblen goods are actually attracted because of the high price.

1. The author states that:

A. All luxury goods are Veblen goods.
B. People will buy more rice if the price of bread goes up.
C. If you increase the price of an elastic good, the quantity purchased will decrease.
D. If you decrease the price of an inelastic good, the total revenue will decrease.
E. Inelastic goods are more important to our lifestyle than are elastic goods.

The author would most likely agree with the following statement:

A. Image may be a determinant in the amount a consumer is willing to pay for an item.
B. There are more elastic goods than inelastic goods in contemporary America.
C. People should switch to more fuel-efficient automobiles if gasoline prices increase long term.
D. Manufacturers routinely take account of elasticity of demand in setting prices.
E. Because the consumer does not know the elasticity of a product, he or she in unlikely to respond based on elasticity.

3. The author suggests that:

A. Elasticity will become increasingly important to pricing decisions as economists become more accurate in measuring elasticity.
B. Raising the price on inelastic goods is unfair to the consumer and should be prohibited.
C. Consumers never have an alternative except to pay more in the face of price increases for inelastic goods.
D. If consumers do not change their purchases of cigarettes in the face of short-term price increases, cigarettes can be called inelastic.
E. Increasing revenues should be the goal of manufacturers.