- A. The price elasticity is less than one ✓
- B. The price elasticity is one
- C. The price elasticity is negative
- D. The price elasticity is greater than one
The answer to the question is: A. The price elasticity is less than one
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
When the price elasticity of demand is less than one, it indicates that the quantity demanded is not very responsive to changes in price. In other words, a change in price has a relatively small impact on the quantity demanded. This implies that the demand for the good is price inelastic.
In practical terms, when demand is price inelastic, consumers are less sensitive to changes in price and are willing to pay higher prices for the good. This can occur for various reasons:
- Necessities: Goods that are considered necessities tend to have price inelastic demand. These are goods that consumers require for daily living, such as food, water, and electricity. Since these goods are essential, consumers are less likely to significantly reduce their consumption even if prices increase.
- Lack of substitutes: When there are limited substitutes available for a particular good, the demand tends to be price inelastic. For example, prescription medications often have few alternatives, leading to a less responsive demand.
- Habitual consumption: If consumers have developed a habit or preference for a specific brand or product, they may be less sensitive to changes in its price. This loyalty or attachment can make the demand for the good relatively inelastic.
- Time horizon: In the short run, consumers may be less able to adjust their consumption patterns and find substitutes for a good, resulting in price inelastic demand. However, over a longer time period, consumers may have more flexibility and be more responsive to changes in price.
