If the price of a product goes up by 10% and, as a result, the quantity demanded falls by 20%, how would you classify the demand?
Show answer & explanation
Correct answer: A
Explanation
The correct answer is Option 1 i.e. Demand is elastic (elasticity greater than 1).
The demand is elastic. This is because the percentage change in quantity demanded (20%) is greater than the percentage change in price (10%). Price elasticity of demand (PED) is calculated as:
PED = % change in quantity demanded ÷ % change in price = 20 ÷ 10 = 2
Since PED is greater than 1, it indicates elastic demand. This means consumers are highly responsive to price changes, and a small increase in price leads to a relatively larger fall in demand.