Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following is a factor that can affect price elasticity of demand?

1. Government policy

2. Consumer income levels

3. Market competition

4. All of the above

The correct answer is: All of the above

The price elasticity of demand measures how responsive the quantity demanded of a good or service is to a change in its price. Several factors can influence this elasticity, and all the options listed contribute in their own way. Government policy can affect price elasticity by influencing the market environment through regulations, taxes, or subsidies. For instance, if a government imposes a heavy tax on a product, it can raise the final price for consumers, potentially decreasing demand depending on how sensitive consumers are to price changes. Consumer income levels also play a significant role. Higher income levels tend to make consumers less sensitive to price changes for necessities (lower elasticity), while for luxury goods, an increase in income can lead to greater demand regardless of price (increased elasticity). Market competition is crucial as well; in a highly competitive market, consumers have more alternatives to choose from. This competition can lead to increased price sensitivity, as consumers will switch to other products if one becomes too expensive, indicating a more elastic demand. Each of these factors intricately influences how consumers react to price changes, and their combined impact encapsulates the comprehensive answer that all are relevant factors affecting price elasticity of demand.