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How does the existence of substitutes for a product affect the product's price elasticity of demand?
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4. Elasticity
Price Elasticity of Demand on a Graph
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Demand can be said to be inelastic when:
A
the percentage change in quantity demanded is greater than the percentage change in price
B
the demand curve is perfectly horizontal
C
the price elasticity of demand is equal to 1
D
the percentage change in quantity demanded is less than the percentage change in price
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Recall the definition of price elasticity of demand, which measures how much the quantity demanded responds to a change in price. It is calculated as:
\[\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\]
Understand that demand is considered inelastic when the quantity demanded changes by a smaller percentage than the price does. This means the absolute value of the price elasticity of demand is less than 1.
Analyze the options given:
- If the percentage change in quantity demanded is greater than the percentage change in price, demand is elastic (elasticity > 1).
- If the demand curve is perfectly horizontal, demand is perfectly elastic (elasticity = infinity).
- If the price elasticity of demand is equal to 1, demand is unit elastic.
Therefore, the correct condition for inelastic demand is when the percentage change in quantity demanded is less than the percentage change in price, which corresponds to an elasticity less than 1 in absolute value.
Summarize that inelastic demand means consumers are relatively unresponsive to price changes, so quantity demanded changes proportionally less than price.
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