Association of Chartered Certified Accountants (ACCA) Certification Practice Test

When demand is perfectly elastic, what does it imply?

1. Consumers are very sensitive to price changes

2. Consumers do not respond to price changes at all

3. The quantity demanded remains constant regardless of price

4. All products are luxury items

The correct answer is: Consumers are very sensitive to price changes

When demand is perfectly elastic, it indicates that consumers are extremely sensitive to any changes in price. This means that even a slight increase in the price of a good or service will lead to a complete drop in the quantity demanded for that good, as consumers will switch to substitutes or alternative options immediately. In a perfectly elastic demand scenario, the price elasticity of demand is infinite, reflecting that consumers are willing to buy any quantity at a specific price but none at all if the price exceeds that level. This concept is particularly relevant in markets where there are close substitutes available and where consumer preference can shift quickly based on price changes. The idea of perfect elasticity highlights the relationship between price and demand, emphasizing that when consumers have the option to change their purchasing decisions rapidly based on price fluctuations, demand will react strongly to those changes. In contrast, the other options do not accurately capture the characteristics of perfectly elastic demand. For instance, saying that consumers do not respond to price changes contradicts the very definition of elasticity. Similarly, the notion that quantity demanded remains constant regardless of price would describe perfectly inelastic demand instead. The assertion that all products are luxury items does not relate directly to the concept of elasticity; luxury items can have various levels of demand elasticity depending on