The price of cold drink increases by 18% and the quantity of cold drink demand falls by 21%. This indicates that the demand for cold drink is:

Question

Accepted Answer

The correct option is 2:
Elasticity of Demand measures the responsiveness of the quantity demanded of a good to a change in its price. The formula for Price Elasticity of Demand (PED) is the percentage change in quantity demanded divided by the percentage change in price. In this case, the percentage change in quantity demanded (21%) is greater than the percentage change in price (18%). When the magnitude of the PED coefficient is greater than 1, the demand is considered elastic. This means consumers are highly responsive to the price change, and a relatively small percentage increase in price leads to a larger percentage decrease in the quantity demanded.

The incorrect option is 1:
Unitarily elastic demand (PED = 1) occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price. Here, 21% is not equal to 18%.

The incorrect option is 3:
Inelastic demand (PED \< 1) occurs when the percentage change in quantity demanded is less than the percentage change in price. Since the demand fell by 21% following an 18% price increase, the demand is highly responsive, not inelastic.

The incorrect option is 4:
Perfectly elastic demand (PED = infinity) occurs in a theoretical situation where any, even the slightest, price increase causes the quantity demanded to fall to zero. In this scenario, there is a measurable, finite change in quantity demanded, indicating it is not perfectly elastic.