Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is generally referred to as the elasticity of demand?

1. The rate at which supply decreases with a price increase

2. The sensitivity of quantity demanded to a change in price

3. The measure of consumers' preferences

4. The connection between price and production cost

The correct answer is: The sensitivity of quantity demanded to a change in price

The elasticity of demand specifically refers to the sensitivity of quantity demanded to a change in price. It measures how much the quantity demanded of a good or service responds to a change in its price. A higher elasticity indicates that consumers are more responsive to price changes, meaning that a small change in price can lead to a significant change in the quantity demanded. Conversely, low elasticity suggests that changes in price have little effect on the quantity demanded, indicating that the good may be a necessity or that there are fewer substitutes available. The other options refer to different economic concepts that do not directly address the responsiveness of quantity demanded to price changes. For instance, the rate at which supply decreases with a price increase is related to supply elasticity, not demand. The measure of consumers' preferences pertains to consumer behavior and utility rather than the specific relationship between price and quantity demanded. Additionally, the connection between price and production cost is more about cost structures and market supply than about consumer demand and price changes.