Correct Option: A
Explanation of Why Option A is Correct:
Elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. Specifically, it quantifies the responsiveness of consumers to price changes. The formula for calculating the price elasticity of demand (PED) is:
[
\text{Price Elasticity of Demand (PED)} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}
]
This means that if the price of a product changes, the elasticity of demand tells us how much the quantity demanded will change in response to that price change.
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Percentage Change in Quantity Demanded: This is calculated as:
[
\text{Percentage Change in Quantity Demanded} = \frac{\text{New Quantity} - \text{Old Quantity}}{\text{Old Quantity}} \times 100
]
-
Percentage Change in Price: This is calculated as:
[
\text{Percentage Change in Price} = \frac{\text{New Price} - \text{Old Price}}{\text{Old Price}} \times 100
]
By dividing the percentage change in quantity demanded by the percentage change in price, we can determine whether demand is elastic (greater than 1), inelastic (less than 1), or unitary elastic (equal to 1).
Why the Other Options are Incorrect:
- Option B: "The percentage change in price divided by the corresponding percentage change in quantity demanded."
-
This option reverses the relationship. It suggests that we should look at how much the price changes in relation to how much the quantity demanded changes, which is not the standard definition of elasticity of demand. This would yield a different measure, not the price elasticity of demand.
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Option C: "The percentage change in quantity demanded divided by the corresponding price."
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This option incorrectly uses price in the denominator instead of the percentage change in price. The elasticity of demand specifically requires the change in price, not the price itself, to understand how demand responds to price changes.
-
Option D: "The percentage change in price divided by the corresponding quantity demanded."
- Similar to Option B, this option also reverses the relationship and uses quantity demanded in the denominator instead of the percentage change in quantity demanded. This does not provide a measure of how demand responds to price changes.
Common Pitfalls:
- Confusing Elasticity with Slope: Elasticity is not the same as the slope of the demand curve. While slope measures the rate of change, elasticity measures the responsiveness of quantity demanded to price changes.
- Ignoring the Sign: Elasticity can be negative (as price increases, quantity demanded typically decreases), but we often refer to the absolute value when discussing elasticity.
- Assuming Constant Elasticity: Elasticity can vary at different points along the demand curve. It is important to calculate it at specific price and quantity levels.
Revision Summary:
- Elasticity of Demand: Measures the responsiveness of quantity demanded to price changes.
- Formula: PED = (Percentage Change in Quantity Demanded) / (Percentage Change in Price).
- Correct Option: A is correct because it accurately reflects the definition of price elasticity of demand.
- Common Mistakes: Confusing elasticity with slope, ignoring the sign, and assuming constant elasticity across the demand curve.