Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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What does unit elasticity signify?

Demand is perfectly inelastic
Price changes do not affect demand
Price and quantity change by the same percentage
Demand is significantly influenced by external factors

The correct answer is: Price and quantity change by the same percentage

Unit elasticity signifies that price changes and quantity demanded change by the same percentage. This concept indicates a specific responsiveness of quantity demanded to price changes, where the percentage change in quantity demanded is exactly equal to the percentage change in price. For example, if the price of a product increases by 10%, the quantity demanded would decrease by precisely 10%, resulting in a total elasticity value of one. This balance reflects a situation where consumers are price-sensitive but equally responsive to price alterations, making it a crucial concept in understanding consumer behavior in economics. In context, the other options do not accurately represent unit elasticity. A suggestion of perfect inelasticity implies that quantity demanded does not change at all with price changes, while asserting that price changes do not affect demand suggests no responsiveness to price shifts. Lastly, the idea that demand is significantly influenced by external factors pertains more to elasticity in general rather than the defined concept of unit elasticity specifically.