Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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Which equation is employed to assess price elasticity of demand?

Percentage change in price ÷ percentage change in quantity demanded
Percentage change in quantity demanded ÷ percentage change in price
Price ÷ quantity demanded
Price change ÷ quantity change

The correct answer is: Percentage change in quantity demanded ÷ percentage change in price

The determination of price elasticity of demand is accomplished through the equation that involves the percentage change in quantity demanded divided by the percentage change in price. This formula highlights the principle that price elasticity of demand quantifies how responsive the quantity demanded of a good is to a change in its price. When the price of a product changes, the resulting effect on the quantity that consumers are willing to buy illustrates the relationship between price sensitivity and demand. A higher value from this calculation indicates that consumers are highly responsive to price changes (elastic demand), while a value less than one suggests they are less responsive (inelastic demand). This assessment is crucial for businesses and economists to understand consumer behavior and make informed decisions related to pricing strategies, sales forecasting, and inventory management. The other equations listed do not accurately represent this relationship as they either misstate the components involved in the calculation or do not conform to the definition of elasticity.