Assuming elasticity is reported in absolute value, a measured elasticity of less than one implies:
A. the good is elastic.
B. the good is inelastic.
C. the good is unitary elastic.
D. Cannot be determined without more information.
The correct answer and explanation is :
The correct answer is B. the good is inelastic.
Explanation:
Elasticity in economics measures how the quantity demanded or supplied of a good responds to a change in its price. When we talk about price elasticity of demand (PED), the formula is typically expressed as:
$$
\text{PED} = \frac{\%\text{ Change in Quantity Demanded}}{\%\text{ Change in Price}}
$$
This elasticity value tells us about the responsiveness of consumers to price changes:
- If elasticity is greater than 1 (in absolute value), the good is considered elastic. This means that the quantity demanded changes by a larger percentage than the price change, implying consumers are relatively sensitive to price changes.
- If elasticity is equal to 1 (in absolute value), the good is unitary elastic. Here, the percentage change in quantity demanded is exactly equal to the percentage change in price.
- If elasticity is less than 1 (in absolute value), the good is considered inelastic. In this case, the quantity demanded changes by a smaller percentage than the price change, meaning that consumers are less sensitive to price changes.
Thus, when elasticity is reported in absolute value, a measured elasticity of less than one means the quantity demanded responds less than proportionally to a price change. Consumers’ behavior is less sensitive to price changes, which is the definition of inelastic demand.
To summarize:
- Elastic: PED > 1 (consumers are responsive to price changes).
- Unitary Elastic: PED = 1 (proportional response to price changes).
- Inelastic: PED < 1 (consumers are less responsive to price changes).
Therefore, if elasticity is less than one in absolute value, the correct answer is that the good is inelastic.