ExpertMedium2 marksMultiple Choice
Syllabus A: The business organisation and its external environmentSyllabus AMicroeconomicsElasticity
ACCA · Question 25 · Syllabus A: The business organisation and its external environment
[Section A] A city's public transport authority increases bus fares by 10%. Following this, they observe that passenger numbers drop by only 2%. Based on this data, how would an economist describe the Price Elasticity of Demand (PED) for bus travel in this city?
[Section A] A city's public transport authority increases bus fares by 10%. Following this, they observe that passenger numbers drop by only 2%. Based on this data, how would an economist describe the Price Elasticity of Demand (PED) for bus travel in this city?
Answer options:
A.
Perfectly elastic
B.
Elastic
C.
Unitary elastic
D.
Inelastic
How to approach this question
Compare the percentage change in quantity demanded to the percentage change in price.
Full Answer
D.Inelastic✓ Correct
Price Elasticity of Demand measures how sensitive demand is to a change in price. If the % change in quantity demanded (2%) is less than the % change in price (10%), the PED is less than 1, which is termed 'inelastic'. This often happens with necessities like public transport where there are few alternatives.
Common mistakes
Confusing elastic and inelastic. Remember: Elastic = stretchy/responsive. Inelastic = rigid/unresponsive.
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