Multiple Choice
In microeconomics, the price elasticity of demand shows how the quantity demanded responds to a change in price, measured as what?
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4. Elasticity
Percentage Change and Price Elasticity of Demand
Multiple Choice
In terms of price elasticity of demand, demand is said to be inelastic when a 1% increase in price leads to a less than 1% decrease in quantity demanded; equivalently, when the absolute value of the price elasticity of demand is in what range?
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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 \(\displaystyle E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
Understand that when demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. This means that the absolute value of the price elasticity of demand is less than 1.
Express this condition mathematically as \(\displaystyle |E_d| < 1\), indicating that the demand is inelastic because quantity demanded changes proportionally less than price.
Contrast this with elastic demand, where \(\displaystyle |E_d| > 1\), meaning quantity demanded changes more than the price change, and unit elastic demand where \(\displaystyle |E_d| = 1\).
Therefore, the range for inelastic demand in terms of the absolute value of price elasticity of demand is \(\displaystyle 0 < |E_d| < 1\), since elasticity cannot be zero for a meaningful price response.
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