Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does a steep demand curve indicate in terms of elasticity?

1. High elasticity of demand

2. Inelastic demand

3. Perfectly elastic demand

4. High supply responsiveness

The correct answer is: Inelastic demand

A steep demand curve signifies that a small change in price leads to a relatively small change in the quantity demanded. This characteristic directly correlates with inelastic demand, meaning that consumers are not very responsive to price changes. In such cases, even if prices increase or decrease, consumers will continue to purchase similar quantities. This concept is essential in understanding market behavior, as consumers may have fewer substitutes available or may consider the product a necessity. As a result, the total revenue for sellers might increase as prices rise because the quantity demanded does not decrease significantly. In contrast, a flatter demand curve would indicate high elasticity, where price changes result in large shifts in the quantity demanded, illustrating the opposite behavior. Therefore, recognizing the nature of the demand curve can assist businesses and economists in making informed pricing and production decisions based on consumer behavior.