Which of the following statements about the price elasticity of demand is correct?

• A. Price elasticity of demand measures the responsiveness of supply to changes in price.
• B. If the price elasticity of demand is less than 1, total revenue increases when price increases.
• C. If the price elasticity of demand is greater than 1, demand is considered elastic.
• D. A price elasticity of demand equal to 0 means demand is perfectly elastic.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definition of price elasticity of demand. It measures how much the quantity demanded of a good responds to a change in its price, mathematically given by the formula: \[\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\]
2. Step 2: Analyze each statement in the problem by comparing it to the definition and properties of price elasticity of demand. For example, the first statement incorrectly refers to supply responsiveness, which relates to price elasticity of supply, not demand.
3. Step 3: Recall the interpretation of elasticity values: - If elasticity > 1, demand is elastic (quantity demanded changes more than price). - If elasticity < 1, demand is inelastic (quantity demanded changes less than price). - If elasticity = 1, demand is unit elastic.
4. Step 4: Understand the relationship between elasticity and total revenue: - When demand is inelastic (elasticity < 1), an increase in price leads to an increase in total revenue. - When demand is elastic (elasticity > 1), an increase in price leads to a decrease in total revenue.
5. Step 5: Recognize the special cases: - A price elasticity of demand equal to 0 means perfectly inelastic demand (quantity demanded does not change with price). - Perfectly elastic demand means elasticity is infinite, not zero.