ACCA Performance Management (F5) Certification Practice Exam

What does it mean if a product has high price elasticity?

1. Demand changes little with price fluctuations

2. Demand is highly responsive to price changes

3. Supply is limited due to high costs

4. Demand increases as prices rise

The correct answer is: Demand is highly responsive to price changes

A product with high price elasticity means that demand is highly responsive to changes in price. When the price of a product increases or decreases, the quantity demanded can change significantly, reflecting consumers’ sensitivity to price variations. This is often observed with non-essential goods or luxury items, where a small change in price can lead to a substantial change in the quantity that consumers are willing to buy. Understanding price elasticity is crucial for businesses as it informs pricing strategies; for instance, if demand is elastic, a price increase might lead to a decrease in overall revenue, while a decrease in price could lead to increased sales. This responsiveness highlights the importance of pricing decisions and market competition. In contrast, less elastic demand suggests that consumers will continue to purchase relatively stable quantities despite price fluctuations, typically the case for essential goods. Therefore, recognizing high price elasticity helps businesses anticipate consumer behavior in response to price changes.