Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the definition of price elasticity of demand?

1. The extent to which price affects supply

2. The relationship between changes in quantity demanded and changes in price

3. The moving average of demand over a period

4. The measure of consumer satisfaction

The correct answer is: The relationship between changes in quantity demanded and changes in price

The definition of price elasticity of demand is centered around the relationship between changes in quantity demanded and changes in price. In economic terms, price elasticity of demand quantifies how much the quantity demanded of a good or service responds to a change in its price. Specifically, it measures the percentage change in quantity demanded resulting from a one-percent change in price. This concept is crucial for businesses and policymakers because understanding the elasticity can influence pricing strategies, revenue projections, and economic policies. For example, if demand for a product is elastic, a slight decrease in price may lead to a significant increase in quantity demanded, potentially increasing overall revenue. Conversely, if demand is inelastic, changes in price will have little effect on the quantity demanded. The other options do not align with the definition of price elasticity of demand. For instance, the relationship between price and supply is not indicative of demand elasticity. The moving average pertains to analyzing data trends over time rather than demand responsiveness, and consumer satisfaction is more related to utility or preference rather than the elasticity of demand concerning price changes.