When the absolute value of the price elasticity of demand is greater than 1, demand is: elastic. inelastic. unit elastic. perfectly inelastic.
The Correct Answer and Explanation is:
The correct answer is elastic.
In economics, price elasticity of demand (PED) measures how sensitive the quantity demanded of a good is to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price.
- Elastic demand occurs when the absolute value of PED is greater than 1. This means that a small percentage change in price leads to a larger percentage change in quantity demanded. For example, if the price of a product increases by 1%, and as a result, the quantity demanded decreases by more than 1%, the demand is considered elastic. Goods with elastic demand are typically non-essential or have close substitutes, like luxury items or products that people can easily replace with alternatives.
- Inelastic demand occurs when the absolute value of PED is less than 1. In this case, a percentage change in price leads to a smaller percentage change in quantity demanded. For example, a 1% price increase might result in less than a 1% decrease in quantity demanded. Goods with inelastic demand are usually necessities, such as basic food items or gasoline, where consumers have limited options to reduce consumption even if the price rises.
- Unit elastic demand happens when the absolute value of PED equals 1. This means that a percentage change in price results in an equal percentage change in quantity demanded.
- Perfectly inelastic demand occurs when the demand curve is vertical, indicating that quantity demanded does not change at all regardless of price changes.
Thus, when the absolute value of the price elasticity of demand is greater than 1, the demand is considered elastic because consumers respond significantly to price changes.
