When the price elasticity of demand is less than 1 in absolute value, demand is considered:

• A. Perfectly elastic
• B. Inelastic
• C. Unit elastic
• D. Elastic

Answer: (B)

Elasticity of demand measures how sensitive the quantity demanded is to a change in price. When the absolute value of that elasticity is less than 1, demand is inelastic: the percentage change in quantity demanded is smaller than the percentage change in price. In practical terms, buyers respond only a little to price moves. This means total revenue tends to move in the same direction as the price: if the price goes up, revenue usually rises because the drop in quantity isn’t large enough to offset the higher price.

For example, a 10% price rise might cause only a 5% drop in quantity demanded, giving an elasticity of -0.5. Since |PED| < 1, demand is inelastic.

This is different from a unit elastic case, where the percentage change in quantity equals the percentage change in price (PED = 1), and from an elastic case, where quantity responds strongly (|PED| > 1). It’s not the case of perfectly elastic demand, which would imply an infinite response to price changes.