Elasticity of demand for goods on which a very small part of income is spent:

Question

Accepted Answer

The correct option is 3:

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. One of the key determinants of PED is the proportion of income spent on the good. For goods that consume a very small percentage of a consumer's total income, the elasticity of demand tends to be inelastic, or "unelastic." Think of items like matchboxes, salt, or needles. Even if the price of salt were to double, the absolute change in expense is negligible compared to a household’s total budget. Consequently, a change in the price of such an inexpensive good does not significantly affect the consumer's real income or their purchasing power for that item, leading to a minimal change in the quantity demanded. Therefore, the demand is considered inelastic (or unelastic), meaning consumers are generally unresponsive to price changes for these low-cost items.

The incorrect option is 1 (is very elastic.):
Demand is considered "very elastic" when a small change in price leads to a proportionately large change in quantity demanded. This characteristic is typically associated with luxury goods or goods with many close substitutes, not with items that form a tiny fraction of a consumer's budget.

The incorrect option is 2 (is elastic.):
Elastic demand (where PED \> 1) occurs when consumers are highly sensitive to price changes. This is generally the case for goods that are expensive or discretionary purchases, as the price change constitutes a significant expense relative to total income.

The incorrect option is 4 (is fully elastic.):
Fully elastic demand (where PED = infinity) is a theoretical concept, usually assumed only in the model of perfect competition, where the demand curve is perfectly horizontal. It means that any price increase above the market price causes demand to drop to zero, which is unrealistic for everyday consumer goods.