Answer:
The demand for tortilla chips is b. inelastic.
Explanation:
Let's keep in mind that elasticity in economics tells us the magnitude of the change in the demanded quantity of a product after its price has changed. In terms of a formula, the price elasticity of demand can be defined as:
[tex]|\frac{ChangeQ}{ChangeP}|[/tex]
Each term is expressed as the percentage of the change, which the problem already provides us with:
[tex]PED=|\frac{-4}{10} |\\PED=|0.4|[/tex]
Now we know that the price elasticity of the tortilla chips demand is of 0.4. What does this number tell us?
- The price elasticity of demand would be elastic if the coefficient is bigger than 1. This would mean that the demanded quantity percentage change is bigger than the percentage change of its price - such good's demand would be greatly sensitive to changes in its price.
- When the price elasticity of demand is equal to one, it is considered to be unit elastic, meaning that the demanded quantity changes proportionately according to the changes in the price.
- If the price elasticity of demand is less than 1, it means that the demanded quantity changes less than the price, so the product is not as sensitive to variations in its price. Such is the case of the tortilla chips in this example. They are considered to be inelastic.
As an additional note:
- Perfect inelasticity refers to the case when the price changes while the demanded quantity remains constant. This means that no matter how cheap or expensive your product is, people will be demanding the same units.
- On the other hand, perfect elasticity refers to the situation where the demanded quantity changes as the price remains constant. This would mean that you cannot decide when to increase or decrease your prices, but your demanded quantity will be changing nonetheless.
