Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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Prepare for the ACCA Certification Exam. Master concepts with flashcards and multiple-choice questions, each with explanations and hints. Get exam ready today!

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What does elasticity of demand measure?

The degree to which income affects demand
The responsiveness of demand to changes in price
The limit of production based on resources
The fluctuation of consumer preferences over time

The correct answer is: The responsiveness of demand to changes in price

The elasticity of demand specifically gauges how sensitive consumers are to changes in price. When discussing this concept, we refer to the percentage change in quantity demanded in relation to a percentage change in price. If a small change in price leads to a significant change in the quantity demanded, the demand is considered elastic. Conversely, if a change in price has little effect on demand, it is inelastic. This responsiveness is crucial for businesses and policymakers to understand because it helps in pricing strategies, budget decisions, and estimating the effects of market changes. The other choices relate to different economic concepts. For instance, the first choice discusses how income influences demand, which pertains to income elasticity rather than price elasticity. The third option addresses production limits influenced by resource availability, which is related to supply rather than demand. The fourth choice regarding consumer preferences fluctuating over time ties more closely to consumer behavior and market trends, rather than the immediate pricing effects captured by demand elasticity.