If the absolute value of the price elasticity of demand for good is .75, the demand for that good is described as
The correct answer and explanation is:
Correct Answer: Inelastic
Explanation (300 words):
The price elasticity of demand (PED) measures how sensitive the quantity demanded of a good is to a change in its price. It is calculated using the formula: PED=% change in quantity demanded% change in price\text{PED} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in price}}
The absolute value of PED is used because demand typically responds negatively to price changes (when price goes up, demand goes down), resulting in a negative PED. However, for interpretation purposes, we focus on the absolute value.
In this case, the absolute value of the price elasticity of demand is 0.75. This falls into the category of inelastic demand, which is defined as:
- Inelastic Demand: PED < 1
- Unit Elastic Demand: PED = 1
- Elastic Demand: PED > 1
Inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price. For example, if the price of the good increases by 10%, the quantity demanded would decrease by only 7.5% (since 0.75 × 10% = 7.5%). Consumers are relatively unresponsive to changes in price.
This kind of behavior usually occurs with necessities or goods with few substitutes, such as basic food items, gasoline, or prescription drugs. Because consumers still need these products regardless of price changes, the quantity demanded doesn’t change much when the price changes.
From a business perspective, if demand is inelastic, raising prices can increase total revenue, because the drop in quantity sold is proportionally smaller than the increase in price.
In summary, when the price elasticity of demand is 0.75 (less than 1), the good is considered inelastic, meaning that consumers are not highly responsive to price changes, and changes in price result in smaller changes in quantity demanded.