Correct Response: A. Price elasticity of demand is a measure of how the demand for a product changes when the price changes. If a small change in price creates a large change in demand, the demand for the product is elastic. If a rather large change in price does not have a large effect on the demand, the demand for the product is inelastic. The elasticity of demand depends on a variety of factors such as availability of substitute goods, brand loyalty, and necessity. Of the products listed, a rise in production costs will most likely lead to a large reduction in the demand for new houses. The demand for new houses is elastic because people will continue to rent and wait until the market changes and house prices decrease. People may also decide to purchase an older house. On the other hand, the demand for wheat (B) is relatively inelastic; people will still continue to purchase bread, pasta, and other products even if the price goes up. Detergent (C) is also demand inelastic, because consumers will still need to purchase detergent to wash clothes, dishes, floors, etc. Pencils (D) are also relatively demand inelastic due to the higher price of substitute products such as pens and markers.
