Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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How is elasticity of demand calculated?

Change in supply ÷ Change in demand
(% change in price) ÷ (% change in demand)
(% change in demand) ÷ (% change in price)
(% change in income) ÷ (% change in quantity supplied)

The correct answer is: (% change in demand) ÷ (% change in price)

Elasticity of demand measures how the quantity demanded of a good responds to changes in price. The correct calculation is the percentage change in quantity demanded divided by the percentage change in price. This reflects the responsiveness of consumers to price changes; a high elasticity indicates that demand significantly changes with price alterations, while a low elasticity suggests that demand is relatively stable despite price changes. When the formula is applied, you can observe how a shift in pricing affects consumer behavior, making it vital for businesses to understand their products' demand elasticity. This concept is particularly relevant in pricing strategies, as it helps to predict market reactions. In contrast, the other choices do not accurately represent this relationship. The first option misconstrues the core components of demand elasticity by focusing on supply instead of demand. The second option mistakenly places the change in price as the numerator rather than demand. Lastly, the fourth option discusses income elasticity, which pertains to demand shifts in response to changes in income rather than price, thereby not being applicable to the specific measure of demand elasticity being asked about.