Assuming elasticity is reported in absolute value, a measured elasticity of greater 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 :
Correct Answer: A. the good is elastic.
Explanation (300 words):
Elasticity is a measure used in economics to show how responsive the quantity demanded or supplied of a good is to a change in its price. When discussing price elasticity of demand, it specifically tells us how much the quantity demanded changes in response to a change in price.
The formula for price elasticity of demand is:
$$
\text{Elasticity} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}
$$
Although the calculated elasticity is often negative due to the law of demand (price and quantity demanded move in opposite directions), economists commonly report the absolute value to make interpretation easier.
Here’s how to interpret elasticity when reported in absolute terms:
- If elasticity > 1, the demand is elastic, meaning consumers are highly responsive to price changes. A small change in price results in a larger change in quantity demanded.
- If elasticity < 1, the demand is inelastic, meaning consumers are not very responsive to price changes. A large price change leads to a small change in quantity demanded.
- If elasticity = 1, the demand is unitary elastic, meaning the percentage change in quantity demanded is equal to the percentage change in price.
So, when elasticity is greater than one (in absolute terms), it implies that the good is elastic. This often happens with luxury goods or goods with many substitutes—consumers can easily switch if the price increases.
For example, if the price of a brand of soda rises and consumers switch to another brand, the original brand is considered elastic. Businesses must be careful when pricing elastic goods, as price increases may significantly reduce total revenue.
Therefore, the correct answer is A. the good is elastic, because a measured elasticity greater than one indicates a relatively high sensitivity to price changes.