If the price-elasticity coefficient for a good is .75, the demand for that good is described as:
Select one:
a. Inferior b. Inelastic c. Normal d. Elastic
The correct answer and explanation is:
The correct answer is b. Inelastic.
The price-elasticity of demand (PED) measures how sensitive the quantity demanded of a good is to changes in its price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. A value of 0.75 means that for every 1% increase in price, the quantity demanded decreases by 0.75%.
When the price-elasticity coefficient is less than 1, demand is considered inelastic. This implies that the quantity demanded does not respond significantly to changes in price. In other words, even if the price of the good increases or decreases, the change in quantity demanded is relatively small.
Inelastic demand is typical for goods that are necessities or have few substitutes, meaning consumers are less likely to reduce their consumption in response to price changes. Common examples include basic utilities like water, electricity, and certain medications.
On the other hand, if the price-elasticity coefficient were greater than 1, the demand would be classified as elastic, meaning that the quantity demanded would be more responsive to price changes. If it were equal to 1, demand would be unitary elastic, where the percentage change in quantity demanded is exactly equal to the percentage change in price.
Thus, with a price-elasticity of 0.75, the demand for the good is inelastic, indicating that price changes will have a relatively small impact on the quantity demanded.