Question

In market A, a 4% increase in price reduces quantity demanded by 2%, so demand in market A is _____. In market B, a 3% increase in price reduces quantity demanded by 4%, so demand in market B is _____.

Answer 1

Answer:

Demand in market A is inelastic. Demand in market B is elastic.

Explanation:

Price elasticity of demand is the measure of the change in quantity demanded in relation to the change in price.

Elasticity = % change in quantity demanded / % change in price

When Elasticity < 1 (2% divided by 4%), demand is said to be inelastic: (quantity demanded changes less as price changes)

When Elasticity > 1 (4% divided by 3%), demand is said to be elastic: (quantity demanded changes more as price changes)