ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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when a good has a number of close substitutes
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when a good is an inferior good
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when the demand for a good is infinitely inelastic
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when the quantity of a good is in fixed supply
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Detailed explanation-1: -If the price for an inelastic good is lowered, the demand for that good does not increase, resulting in less overall revenue due to the lower price and no change in demand. This would indicate that the firm should not reduce the price of its goods as there is no beneficial outcome in doing so.
Detailed explanation-2: -There are two basic types of non-price rationing, although actual practice often involves some mixture of both. These are queue rationing, and allocation schemes.
Detailed explanation-3: -People with high income have more voting power than the poor. Producers produce goods and services for them who have large money power. Thus, the price mechanism cannot ensure social justice; rather, it widens inequality in the distribution of income and wealth-’the rich get richer, the poor poorer’.
Detailed explanation-4: -The rationing function of the price mechanism Whenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of such a price rise is to discourage demand, conserve resources, and spread out their use over time.