Assuming elasticity is reported in absolute value, an elastic demand has a measured elasticity:
A. greater than one.
B. less than one.
C. of exactly one.
D. greater than zero and less than one.
The correct answer and explanation is :
The correct answer is:
A. greater than one.
Explanation:
Elasticity of demand refers to how sensitive the quantity demanded of a good or service is to changes in its price. The formula for price elasticity of demand (PED) is:
$$
\text{PED} = \frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}
$$
When we talk about elasticity in absolute terms, we focus on the magnitude of the price elasticity without considering its sign. A demand is considered elastic when the absolute value of elasticity is greater than one, meaning that the percentage change in quantity demanded is greater than the percentage change in price.
For example, if the price of a product increases by 5% and the quantity demanded decreases by 10%, the elasticity is:
$$
\text{PED} = \frac{-10\%}{5\%} = -2
$$
The absolute value of elasticity is 2, which is greater than one. This indicates that the demand for this good is elastic, meaning consumers are highly responsive to price changes.
Elastic demand generally occurs for goods that have close substitutes or are considered non-essential, meaning that consumers can easily switch to alternatives if the price rises. For example, if the price of a specific brand of soda rises, consumers may quickly switch to a competing brand or another beverage.
In contrast, if the absolute value of elasticity is less than one, the demand is considered inelastic, meaning that quantity demanded is not very responsive to price changes. If the elasticity is exactly one, the demand is unit elastic, meaning the percentage change in quantity demanded is exactly equal to the percentage change in price.
In conclusion, when demand is elastic, a small change in price leads to a proportionally larger change in quantity demanded, which is why the elasticity is greater than one.