Determine Which Statement About the Absolute Value of the Price Elasticity of Demand Is Correct

The price elasticity of demand is a crucial concept in economics that measures the responsiveness of the quantity demanded of a good or service to a change in its price. It helps determine how buyers react when the price of a product changes, and whether demand for that product is elastic or inelastic. The absolute value of the price elasticity of demand is a key indicator that provides insights into the magnitude of demand responsiveness. In this article, we will discuss various statements about the absolute value of the price elasticity of demand and determine which statement is correct.

Statement 1: The absolute value of the price elasticity of demand is always positive.

This statement is correct. The absolute value of the price elasticity of demand is always positive because it measures the responsiveness of quantity demanded irrespective of the direction of the price change. By taking the absolute value, we discard the negative sign that indicates the direction of change.

Statement 2: The absolute value of the price elasticity of demand can be greater than one.

This statement is correct. The absolute value of the price elasticity of demand can be greater than one, indicating that demand is elastic. Elastic demand means that a small change in price leads to a proportionately larger change in quantity demanded.

Statement 3: The absolute value of the price elasticity of demand can be less than one.

This statement is correct. The absolute value of the price elasticity of demand can be less than one, indicating that demand is inelastic. Inelastic demand means that a change in price results in a proportionately smaller change in quantity demanded.

Statement 4: The absolute value of the price elasticity of demand can be equal to zero.

This statement is correct. The absolute value of the price elasticity of demand can be equal to zero, indicating perfect inelasticity. When demand is perfectly inelastic, the quantity demanded remains constant despite changes in price.

Statement 5: The absolute value of the price elasticity of demand can be infinite.

This statement is incorrect. The absolute value of the price elasticity of demand cannot be infinite. Infinite elasticity implies that any change in price will result in an infinite change in quantity demanded, which is unrealistic.

Statement 6: The absolute value of the price elasticity of demand is always constant.

This statement is incorrect. The absolute value of the price elasticity of demand can vary along the demand curve. It depends on factors such as the availability of substitutes, the time period considered, and the necessity of the good or service.

Statement 7: The absolute value of the price elasticity of demand is always greater for luxury goods.

This statement is generally correct. Luxury goods, which have readily available substitutes and are not necessities, tend to have higher price elasticities of demand compared to essential goods. This means that consumers are more responsive to price changes for luxury items.

Statement 8: The absolute value of the price elasticity of demand is always greater in the long run compared to the short run.

This statement is generally correct. In the long run, consumers have more time to adjust their behavior, find substitutes, and change their purchasing habits. Therefore, price elasticity of demand tends to be higher in the long run compared to the short run.

Statement 9: The absolute value of the price elasticity of demand is always higher for goods with a narrow market definition.

This statement is incorrect. The market definition does not determine the absolute value of the price elasticity of demand. The elasticity depends on factors such as the availability of substitutes, the time period considered, and the necessity of the good or service.

Statement 10: The absolute value of the price elasticity of demand is always higher for goods with longer product life cycles.

This statement is generally correct. Goods with longer product life cycles tend to have higher price elasticities of demand. Consumers have more time to adjust their purchasing habits and find substitutes as the product stays in the market for an extended period.

Statement 11: The absolute value of the price elasticity of demand is always higher for goods with higher income elasticities.

This statement is incorrect. The income elasticity of demand measures the responsiveness of quantity demanded to changes in income, not price changes. It is a different concept from the price elasticity of demand.

Statement 12: The absolute value of the price elasticity of demand is always higher for goods with higher cross-price elasticities.

This statement is generally correct. Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to changes in the price of another good. If two goods are substitutes, the price elasticity of demand for each good will be higher.

FAQs:

1. What does a price elasticity of demand greater than one indicate?

A price elasticity of demand greater than one indicates that demand is elastic. Consumers are highly responsive to price changes for the product.

2. Can the price elasticity of demand be negative?

Yes, the price elasticity of demand can be negative. A negative value indicates that demand is inversely related to price, which is common for inferior goods.

3. What does a price elasticity of demand equal to zero signify?

A price elasticity of demand equal to zero signifies perfect inelasticity. Changes in price have no impact on the quantity demanded.

4. Why is the absolute value of the price elasticity of demand important?

The absolute value of the price elasticity of demand is important as it provides insights into the magnitude of demand responsiveness, regardless of the direction of price change.

5. How does the availability of substitutes affect the price elasticity of demand?

The availability of substitutes has a significant impact on the price elasticity of demand. The more substitutes available, the higher the elasticity, as consumers have alternative options to choose from.

6. Which factors determine the price elasticity of demand?

The price elasticity of demand is determined by factors such as the availability of substitutes, the time period considered, the necessity of the good or service, and consumer habits.

7. Can the price elasticity of demand change over time?

Yes, the price elasticity of demand can change over time. It can vary along the demand curve and may be higher in the long run compared to the short run.

8. Are luxury goods more price elastic than essential goods?

Yes, luxury goods are generally more price elastic than essential goods. Consumers are more responsive to price changes for luxury items as they have readily available substitutes.

9. Does the market definition affect the price elasticity of demand?

No, the market definition does not affect the price elasticity of demand. The elasticity depends on factors such as substitutes, time period, and necessity, rather than the specific market definition.

10. How does the length of a product’s life cycle affect its price elasticity of demand?

Goods with longer product life cycles tend to have higher price elasticities of demand. Consumers have more time to adjust their purchasing habits and find substitutes for goods that stay in the market for an extended period.

11. What is the difference between price elasticity of demand and income elasticity of demand?

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price, while income elasticity of demand measures the responsiveness to changes in income.

12. Does the price elasticity of demand depend on cross-price elasticities?

Yes, the price elasticity of demand depends on cross-price elasticities. If two goods are substitutes, the price elasticity of demand for each good will be higher.