Multiple Choice
Which of the following statements about the price elasticity of demand is correct?
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4. Elasticity
Percentage Change and Price Elasticity of Demand
Multiple Choice
In terms of the price elasticity of demand, what is the key difference between elastic and inelastic demand?
A
Demand is elastic when quantity demanded changes less (in percentage terms) than price, and inelastic when quantity demanded changes more (in percentage terms) than price.
B
Demand is elastic when the price elasticity of demand equals zero (|| = 0), and inelastic when it equals one (|| = 1).
C
Demand is elastic when the absolute value of the price elasticity of demand is greater than 1 (|| > 1), and inelastic when it is less than 1 (|| < 1).
D
Demand is elastic when a price increase raises total revenue, and inelastic when a price increase lowers total revenue.
Verified step by step guidance1
Recall the definition of price elasticity of demand, which measures the responsiveness of quantity demanded to a change in price. It is calculated as:
\(\left|E_d\right| = \left| \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} \right|\)
Understand that when demand is elastic, the quantity demanded changes by a larger percentage than the price change. This means:
\(\left|E_d\right| > 1\)
Conversely, when demand is inelastic, the quantity demanded changes by a smaller percentage than the price change, so:
\(\left|E_d\right| < 1\)
Note that if the absolute value of the price elasticity of demand equals exactly 1, demand is said to be unit elastic, meaning the percentage changes in quantity and price are equal.
Summarize the key difference: Elastic demand means consumers are highly responsive to price changes (large quantity change), while inelastic demand means consumers are less responsive (small quantity change), as captured by the magnitude of \(\left|E_d\right|\) relative to 1.
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