Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does price elasticity of demand measure?

1. The relationship between supply and demand

2. The impact of consumer income on demand

3. The changes in quantity demanded related to price changes

4. The effects of advertising on sales

The correct answer is: The changes in quantity demanded related to price changes

Price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. This concept assesses how much the quantity demanded will increase or decrease when there is a change in price, allowing businesses and economists to understand consumer behavior in relation to pricing strategies. When the price of a product changes, if the quantity demanded changes significantly, it is said to have high price elasticity. Conversely, if the quantity demanded changes little despite price alterations, then the demand is considered to be inelastic. The ability to quantify this relationship helps firms in making decisions about pricing, inventory management, and marketing strategies. The other alternatives do not accurately represent what price elasticity of demand measures. For instance, the relationship between supply and demand (choice A) pertains more to the broader economic theory of how prices are determined in a market. The impact of consumer income on demand (choice B) relates to income elasticity of demand, which assesses how consumer purchasing power affects demand for certain goods. The effects of advertising on sales (choice D) is not a measure of price responsiveness, but rather how marketing initiatives can influence consumer purchasing behavior independently from price changes.