- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand
CFA Practice Question
As the price of a normal product drops, demand ______
A. becomes more elastic.
B. becomes more inelastic.
C. can become either more or less elastic depending on other factors.
Explanation: Elasticity falls as you move down along a linear demand curve.
User Contributed Comments 10
| User | Comment |
|---|---|
| danlan | When it becomes cheaper, people care less about the price change. |
| aakash1108 | I don't think this is necessary......if increase in demand is proportionate to decrease in price, demand doesn't get inelastic or elastic.....the Price elasticity of demand remains 1 as in Unitary elastic. |
| aakash1108 | Hmmm...thinking deeper about this question....it makes sense.....in the range of Unitary elastic, as the price decreases, the demand becomes more inelastic and if the decrease in price is a continuous process, there will be a point on the Demand curve where the demand gets inelastic..... |
| surjoy | danlan's simple and rationale explanation makes sense.. |
| Criticull | The assumption of linear demand without stating it is a gross generalization. |
| JeremyMartin | how does the income effect play into this question? if the income of a person decreases, will the elasticity of the normal good increase? |
| NIKKIZ | This question is unfair because elasticity depends on where the price/quantity being produced are located on the demand curve. If the qty produced is low and the price high, then demand would be elastic. If the qty produced was high at a low price, then the demand would be inelastic. The halfway point would be unit elastic. So the real answer to this question should be C. |
| bidisha | Think of matchbox prices. Since its so CHEAP, people don't care even if price doubles. Which means the cheaper the product, the more inelastic the demand. |
| farhan92 | ^ or if the matches cost more than 10p you just ask someone for a lighter...for free |
| kek01 | I always pictured the demand curve as convex. That's wrong though follow this logic, as it should decline faster if price drops (and elasticity increases). |