ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The change in demand is less than the change in price
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The change in demand is more than the change in price
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A change in price doesn’t cause a change in demand at all
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A change in price leads to a proportionate change in demand
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Detailed explanation-1: -When PED is less than one, demand is inelastic. This can be interpreted as consumers being insensitive to changes in price: a 1% increase in price will lead to a drop in quantity demanded of less than 1%.
Detailed explanation-2: -If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level.
Detailed explanation-3: -If price elasticity is greater than 1, the good is elastic; if less than 1, it is inelastic. If a good’s price elasticity is 0 (no amount of price change produces a change in demand), it is perfectly inelastic.
Detailed explanation-4: -Relatively inelastic demand The demand for a commodity is said to be relatively inelastic when change in price leads to a proportionately less change in the quantity demanded. Here, |ed| < 1. The elasticity of demand is less than one i.e. |Ed| < 1.
Detailed explanation-5: -Price inelastic demand means only that the percentage change in quantity is less than the percentage change in price, not that the change in quantity is zero.