Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases allocative efficiency by allowing consumers to respond more to price changes.
B
It decreases allocative efficiency by causing producers to restrict output.
C
It has no effect on allocative efficiency.
D
It makes prices more stable in the market.
Understanding the Answer
Let's break down why this is correct
Answer
When the price elasticity of demand increases, it means that consumers are more sensitive to changes in price. In a competitive market, this can lead to a situation where producers have to adjust their prices more frequently to meet consumer preferences. If prices are set too high, consumers will buy less, and if they are set too low, producers may not cover their costs. This constant adjustment helps ensure that resources are allocated efficiently, as producers respond to what consumers actually want at various price points. For example, if a company raises the price of a popular snack, and many consumers stop buying it, the company may lower the price to regain sales, thus finding a better balance between supply and demand.
Detailed Explanation
When demand is more elastic, consumers change their buying habits more with price changes. Other options are incorrect because Some might think that higher elasticity means producers will make less; It's a common mistake to think elasticity doesn't matter.
Key Concepts
supply and demand
price elasticity
Topic
Allocative Efficiency and Pricing
Difficulty
medium level question
Cognitive Level
understand
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