Assuming elasticity is reported in absolute value, a measured price elasticity of demand of 0.4 would indicate:
A. an elastic demand, meaning the percentage change in quantity demanded will be greater than the percentage change in price.
B. an inelastic demand, meaning the percentage change in quantity demanded will be greater than the percentage change in price.
C. an elastic demand, meaning the percentage change in quantity demanded will be less than the percentage change in price.
D. an inelastic demand, meaning the percentage change in quantity demanded will be less than the percentage change in price.
The correct answer and explanation is :
Correct Answer: D. an inelastic demand, meaning the percentage change in quantity demanded will be less than the percentage change in price.
Explanation:
Price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price:
$$
\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}
$$
Economists often report elasticity as an absolute value (ignoring the negative sign, since price and quantity demanded typically move in opposite directions due to the law of demand). A key threshold in interpreting elasticity is 1:
- If PED > 1: Demand is elastic, meaning consumers respond strongly to price changes. A small change in price results in a large change in quantity demanded.
- If PED < 1: Demand is inelastic, meaning consumers respond weakly to price changes. A change in price leads to a smaller percentage change in quantity demanded.
- If PED = 1: Demand is unit elastic, meaning the percentage change in quantity demanded equals the percentage change in price.
In this question, a PED of 0.4 means that a 1% change in price leads to only a 0.4% change in quantity demanded. Since 0.4 is less than 1, this indicates inelastic demand. Consumers are relatively unresponsive to price changes—perhaps because the good is a necessity, lacks substitutes, or represents a small portion of their budget.
Therefore, option D is correct: this is an inelastic demand, and the percentage change in quantity demanded is less than the percentage change in price.
Understanding elasticity helps businesses and policymakers make pricing decisions and predict consumer behavior.