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Identify the coefficient of price-elasticity of demand when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price :
- a)Equal to one.
- b)Greater than one.
- c)Smaller than one.
- d)Zero.
Correct answer is option 'C'. Can you explain this answer?
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Coefficient of Price-Elasticity of Demand
The coefficient of price-elasticity of demand measures the responsiveness of the quantity of a good demanded to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Formula:
Price-Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Coefficient of Price-Elasticity of Demand when Quantity Demanded is Smaller than Price
When the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, it means that the demand for the good is relatively inelastic. This can happen when the good is a necessity or when there are no close substitutes available.
In this case, the coefficient of price-elasticity of demand will be smaller than one. This is because the percentage change in quantity demanded will be smaller than the percentage change in price. The demand for the good is not very sensitive to the change in price.
For example, if the price of bread falls by 10%, but the quantity demanded only increases by 2%, the coefficient of price-elasticity of demand will be:
Price-Elasticity of Demand = (2%) / (-10%) = -0.2
Since the coefficient is negative, it means that the good is an inferior good. And since the coefficient is smaller than one, it means that the demand for bread is relatively inelastic.
Conclusion
In conclusion, when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, the coefficient of price-elasticity of demand will be smaller than one. This indicates that the demand for the good is relatively inelastic.
The coefficient of price-elasticity of demand measures the responsiveness of the quantity of a good demanded to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Formula:
Price-Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Coefficient of Price-Elasticity of Demand when Quantity Demanded is Smaller than Price
When the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, it means that the demand for the good is relatively inelastic. This can happen when the good is a necessity or when there are no close substitutes available.
In this case, the coefficient of price-elasticity of demand will be smaller than one. This is because the percentage change in quantity demanded will be smaller than the percentage change in price. The demand for the good is not very sensitive to the change in price.
For example, if the price of bread falls by 10%, but the quantity demanded only increases by 2%, the coefficient of price-elasticity of demand will be:
Price-Elasticity of Demand = (2%) / (-10%) = -0.2
Since the coefficient is negative, it means that the good is an inferior good. And since the coefficient is smaller than one, it means that the demand for bread is relatively inelastic.
Conclusion
In conclusion, when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, the coefficient of price-elasticity of demand will be smaller than one. This indicates that the demand for the good is relatively inelastic.
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