Inelastic demand refers to a situation in which the price elasticity of demand is

• A. Less than 1 in absolute value, so a 1% increase in price leads to less than a 1% decrease in quantity demanded
• B. Greater than 1 in absolute value, so a 1% increase in price leads to more than a 1% decrease in quantity demanded
• C. Equal to 0, so quantity demanded does not change when price changes
• D. Equal to 1 in absolute value, so a 1% increase in price leads to exactly a 1% decrease in quantity demanded

Answer: (A)

Verified step by step guidance

1. Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, expressed as: \[\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\]
2. Recognize that elasticity values can be interpreted as follows: - If the absolute value of elasticity is greater than 1, demand is elastic (quantity demanded changes more than price changes). - If the absolute value is exactly 1, demand is unit elastic (quantity demanded changes proportionally to price changes). - If the absolute value is less than 1, demand is inelastic (quantity demanded changes less than price changes).
3. Focus on the definition of inelastic demand, which means that the percentage change in quantity demanded is smaller than the percentage change in price. This implies the absolute value of the price elasticity of demand is less than 1.
4. Apply this understanding to interpret the effect of a 1% increase in price on quantity demanded under inelastic demand: since elasticity is less than 1 in absolute value, the quantity demanded decreases by less than 1%.
5. Summarize that inelastic demand corresponds to a price elasticity of demand less than 1 in absolute value, meaning consumers are relatively unresponsive to price changes.