When is demand considered inelastic?

• A. When elasticity is greater than 1
• B. When elasticity equals 1
• C. When elasticity is less than 1
• D. When demand is perfectly elastic

Answer: (C)

Demand is considered inelastic when the elasticity of demand is less than 1. This implies that the percentage change in quantity demanded is smaller than the percentage change in price. In practical terms, this means that consumers do not significantly reduce their quantity demanded in response to price increases; they are relatively insensitive to price changes.

For example, necessities like food or fuel often have inelastic demand because consumers need them regardless of price fluctuations. Understanding this concept is crucial for businesses and policymakers as it helps them anticipate consumer behavior in different pricing scenarios.

In contrast, demand is considered elastic when the elasticity is greater than 1, meaning that a small change in price will lead to a larger change in quantity demanded. When elasticity equals 1, it indicates unitary elasticity where the percentage change in quantity demanded is exactly equal to the percentage change in price. Perfectly elastic demand means that consumers will only buy at a specific price and will not purchase at any higher price at all, indicating complete sensitivity to price changes.