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.
Price elasticity of demand (PED) measures how sensitive the quantity demanded of a good is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. The absolute value of PED helps classify demand into different categories.
- Elastic demand occurs when the absolute value of PED is greater than 1. This means that the percentage change in quantity demanded is greater than the percentage change in price. In other words, consumers are highly responsive to price changes. For example, if the price of a good increases by 10%, and the quantity demanded decreases by 20%, the absolute value of PED would be 2 (which is greater than 1), indicating elastic demand. Goods with many substitutes, luxuries, or non-essential products often have elastic demand.
- Inelastic demand occurs when the absolute value of PED is less than 1. This means that the percentage change in quantity demanded is smaller than the percentage change in price. Consumers are less responsive to price changes. For example, if the price of a good increases by 10%, and the quantity demanded only decreases by 2%, the PED would be 0.2 (which is less than 1), indicating inelastic demand. Necessary goods like basic food items or prescription medications typically exhibit inelastic demand.
- Unit elastic demand occurs when the absolute value of PED equals 1. This means the percentage change in quantity demanded is exactly equal to the percentage change in price.
- Perfectly inelastic demand occurs when the absolute value of PED is 0. This means that no matter how much the price changes, the quantity demanded remains unchanged.
In summary, when the absolute value of the price elasticity of demand is greater than 1, demand is considered elastic, meaning consumers are very responsive to price changes.
