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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A tea seller notes that a 10% rise in the price of tea leads to a 4% fall in quantity demanded. Which description of demand is correct?

Demand is relatively inelastic. Elasticity equals the 4 percent fall in quantity divided by the 10 percent rise in price, which is 0.4, less than one. Quantity responds less than proportionately to price. Perfectly inelastic demand would require no change in quantity at all.

  1. AElastic, since quantity fell
  2. BUnitary elastic, since both changed
  3. CInelastic, since elasticity is 0.4Correct
  4. DPerfectly inelastic, since demand still exists

Explanation

Elasticity = 4%/10% = 0.4, which is less than 1. Demand is therefore relatively inelastic. Perfectly inelastic would need zero change in quantity, so the last option is wrong.

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