Question

A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. The demand for beer is:

Answer 1

Answer:

The demand for beer is inelastic

Explanation:

Price Elasticity of Demand (PED) is the measure of responsiveness of the demand of a consumer to a product to a change in the price of the product. The formula is percentage change in quantity demanded divided by percentage change in price.

A PED of greater than 1 is elastic, meaning that the demand for a product is sensitive to the very small change in price.

A PED of less than 1 is said to be inelastic, which implies that there is no significant change in the quantity demanded when the price changes. In our example, the PED is inelastic because:

$PED = \frac{\%\ change\ in\ demand}{\%\ change\ in\ price}\\ PED =\frac{1}{4} \\PED = 0.25$

since 0.25 is less than 1, PED is inelastic

Finally, if the ratio of the percentage changes in both quantities demanded and price equals 1, it is said to be unit elastic. This means that there is a proportionate change in quantity demanded with a change in price.