Assuming elasticity is reported in absolute value, an inelastic demand has a measured elasticity:
A. of greater than zero.
B. of greater than one.
C. of less than one.
D. of exactly one.
The correct answer and explanation is :
The correct answer is C. of less than one.
Explanation:
Elasticity in economics measures how responsive the quantity demanded of a good is to a change in its price. This is typically referred to as price elasticity of demand (PED). It is calculated using the following formula:
$$
\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}
$$
The elasticity value can help classify demand into different categories:
- Elastic Demand: When demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price. The elasticity value is greater than 1. Consumers are highly responsive to price changes, and a price increase typically results in a large drop in demand.
- Unitary Elastic Demand: This occurs when the percentage change in quantity demanded is equal to the percentage change in price, giving an elasticity value of exactly 1. In this case, total revenue remains unchanged when the price changes.
- Inelastic Demand: When demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. The elasticity value is less than 1. This means that consumers are not very responsive to price changes. A price increase results in a relatively small decrease in quantity demanded, and businesses can raise prices without significantly losing sales. Examples include necessities like medicine or basic food items.
Why “less than one” is inelastic:
In the case of inelastic demand, the elasticity value (in absolute terms) is less than 1, meaning the demand for the good does not respond strongly to price changes. For example, if the price of a good increases by 10% and the quantity demanded decreases by only 5%, the elasticity of demand would be 0.5 (which is less than 1), indicating inelastic demand.
In summary, inelastic demand is characterized by an elasticity value of less than one because the quantity demanded changes less than the price change.