In the case of elastic demand, what happens when price falls?

• A. Quantity demanded increases by a smaller percentage than the price decrease
• B. Quantity demanded remains unchanged
• C. Quantity demanded increases by a larger percentage than the price decrease
• D. Quantity demanded decreases

Answer: (C)

Elastic demand means the percentage change in quantity demanded is larger than the percentage change in price. So when price falls, buyers respond with a proportionally bigger increase in quantity demanded than the price drop. For example, if the price drops by 10% and the demand is elastic (elasticity greater than 1 in magnitude), quantity demanded might rise by about 20%. This larger response in quantity is why the outcome described—quantity demanded increasing by a larger percentage than the price decrease—is the correct characterization. (As a side note, total revenue would tend to fall in this case because the price reduction is more than offset by the bigger gain in quantity.)