🛒principles of microeconomics review

key term - Price-Sensitive

Definition

Price-sensitive refers to the degree to which the quantity demanded or supplied of a good or service is affected by changes in its price. It is a central concept in the analysis of price elasticity of demand and supply.

5 Must Know Facts For Your Next Test

  1. Goods and services with price-sensitive demand or supply tend to have higher price elasticity, meaning a given percentage change in price will result in a larger percentage change in quantity demanded or supplied.
  2. Factors that contribute to price sensitivity include the availability of substitutes, the proportion of a consumer's budget spent on the good, and the time horizon being considered.
  3. Price-sensitive goods and services are often considered to have more elastic demand or supply, as consumers and producers are more responsive to changes in price.
  4. Understanding the price sensitivity of a market is crucial for businesses when setting prices and for policymakers when considering the impact of taxes or subsidies.
  5. The concept of price sensitivity is central to the law of demand, which states that as the price of a good rises, the quantity demanded falls, and vice versa.

Review Questions

  • Explain how the concept of price sensitivity relates to the price elasticity of demand.
    • The degree of price sensitivity is directly related to the price elasticity of demand. Goods and services with price-sensitive demand tend to have higher price elasticity, meaning a given percentage change in price will result in a larger percentage change in quantity demanded. This is because consumers are more responsive to price changes for these products, often due to the availability of substitutes or the proportion of their budget spent on the good. Understanding the price sensitivity of demand is crucial for businesses when setting prices and for policymakers when considering the impact of taxes or subsidies.
  • Describe how the concept of price sensitivity relates to the price elasticity of supply.
    • Similar to the relationship with demand, the degree of price sensitivity is also directly related to the price elasticity of supply. Goods and services with price-sensitive supply tend to have higher price elasticity, meaning a given percentage change in price will result in a larger percentage change in quantity supplied. This is because producers are more responsive to price changes for these products, often due to factors like the ease of adjusting production or the availability of alternative uses for the resources used in production. Understanding the price sensitivity of supply is important for businesses when making production and inventory decisions, as well as for policymakers when considering the impact of price controls or other interventions.
  • Analyze how the concept of price sensitivity can be used to predict the effects of changes in price on the equilibrium of a market.
    • The concept of price sensitivity is central to understanding how changes in price affect the equilibrium of a market. Goods and services with price-sensitive demand or supply will experience larger changes in quantity demanded or supplied in response to a given price change, leading to more significant shifts in the equilibrium price and quantity. Conversely, goods and services with less price-sensitive demand or supply will have smaller changes in quantity, resulting in more muted adjustments to the market equilibrium. This knowledge allows economists and policymakers to anticipate the likely effects of taxes, subsidies, or other interventions that impact the prices in a market, and to design policies that achieve desired outcomes based on the price sensitivity of the relevant goods and services.

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