Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does elasticity generally refer to in economics?

1. The stability of products in the market

2. The responsiveness of one variable to changes in another

3. The fixed relationship between supply and demand

4. The measure of market competition

The correct answer is: The responsiveness of one variable to changes in another

Elasticity in economics primarily refers to the responsiveness of one variable to changes in another variable. This concept is crucial for understanding how various factors, such as price or income changes, affect the quantity demanded or supplied of goods and services. For instance, price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price. If demand is elastic, a small change in price leads to a larger change in quantity demanded. Conversely, if demand is inelastic, quantity demanded changes little with price fluctuations. This responsiveness provides insights into consumer behavior, market dynamics, and aids businesses and policymakers in forecasting the effects of economic changes. It is also applied not only to price but also to income and cross-elasticity, helping to assess how different factors interplay in the economy. In contrast, the other options do not encapsulate the comprehensive nature of what elasticity represents in economic terms. For example, the idea of stability in the market does not directly relate to elasticity but rather to market conditions. Similarly, a fixed relationship between supply and demand does not accurately describe the dynamic nature of elasticity. Finally, while market competition is an essential concept in economics, it is not synonymous with elasticity, which focuses more on the responsiveness of variables rather