Which economic term describes a service with a price elasticity of demand of 0.25?
The economic term that describes a service with a price elasticity of demand of 0.25 is known as "inelastic demand."
To understand this further, let's break it down:
Price elasticity of demand is a measure that quantifies the change in demand for a product or service in response to a change in its price. The value of price elasticity can range from highly elastic (greater than 1) to perfectly inelastic (equal to 0).
In this case, a price elasticity of demand of 0.25 indicates that the service is relatively inelastic. An inelastic demand means that a change in the service's price would result in a proportionately smaller change in the quantity demanded. In other words, even if the price of the service increases, the demand for the service would not decrease significantly, and vice versa.
To calculate the price elasticity of demand, you need to use the formula:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price.
In this case, if the price elasticity of demand is 0.25, it means that for a certain percentage change in price (let's say 1%), the quantity demanded would change by 0.25% only. This indicates a relatively low sensitivity to changes in price.
It is worth noting that the concept of price elasticity of demand is crucial for producers, as it helps them understand how changes in price can impact their revenue and profitability.