Demand is elastic if the price elasticity of demand is
a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.
The correct answer and explanation is :
The correct answer is d. greater than 1.
Explanation:
In economics, demand is considered elastic when the price elasticity of demand (PED) is greater than 1. The price elasticity of demand is a measure of how much the quantity demanded of a good or service changes in response to a change in its price. Specifically, it is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elastic Demand (PED > 1):
When demand is elastic, it means that consumers are highly responsive to changes in price. A small change in price leads to a relatively larger change in quantity demanded. For example, if the price of a product decreases by 10% and as a result, the quantity demanded increases by more than 10%, the demand for that product is elastic.
Elastic demand often occurs for luxury goods or goods with many available substitutes. If the price of a product rises, consumers can easily switch to an alternative, and as a result, the quantity demanded will significantly decrease. Conversely, if the price drops, the quantity demanded increases significantly.
Inelastic Demand (PED < 1):
In contrast, when demand is inelastic (PED < 1), consumers are less responsive to price changes. A change in price leads to a smaller proportional change in quantity demanded. For example, if the price of a good increases by 10% but the quantity demanded only decreases by 2%, the demand is inelastic. This typically occurs with necessities or goods that have few substitutes, such as basic food items or certain medications.
Unitary Elastic Demand (PED = 1):
When demand is unitary elastic (PED = 1), the percentage change in quantity demanded is exactly equal to the percentage change in price. In this case, the total revenue remains constant, as the increase in price is offset by a proportional decrease in quantity demanded, and vice versa.
In summary, elastic demand occurs when the price elasticity is greater than 1, meaning consumers respond significantly to price changes, usually in the case of non-essential or highly substitutable goods.