The Relationship Between Price and Quantity Demanded
Tasty Treat Tea is a popular iced tea drink. When the manufacturer begins to use imported tea leaves, the price rises by 10%, and the quantity demanded falls by 20%. The fact that quantity demanded changed by more than the price change suggests that:
Answer: The correct answer is B) The demand for Tasty Treat Tea is elastic.
Explanation: An elastic demand is that demand that is sensitive to a change in price. In this way, a small variation in the price causes a more than proportional change in the quantity demanded. Thus, for example, if the price increases by 10% and in response the quantity demanded is reduced by more than 10%, then the demand is said to be elastic.
There are several factors that determine the elasticity of demand at a given time. Here are some factors that make demand tend to be more elastic:
Goods with more and better substitutes have a more elastic demand than goods that lack substitutes.
In the long term, the demands are more elastic than in the short term.
The goods in which the consumer spends an important part of his budget usually have a more elastic demand than those in which the portion of the expenditure is insignificant.
What does it mean when the demand for a product is considered elastic?
When the demand for a product is considered elastic, it means that a small change in price results in a proportionally greater change in the quantity demanded. This indicates a high sensitivity of consumers to price fluctuations.