Unitary elasticity of demand means that the percentage change in quantity demanded is equal to the percentage change in price. Mathematically, if %ΔQ = %ΔP, then elasticity is unitary. This implies a proportional response to price changes.

Inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price. This indicates that consumers are not very responsive to price changes. A price increase will lead to a smaller decrease in quantity demanded.

If the price of a good increases:

• Unitary Elasticity: The quantity demanded will decrease by the same proportion as the price increase. For example, if the price increases by 10%, the quantity demanded will decrease by 10%.
• Inelastic Demand: The quantity demanded will decrease by a smaller proportion than the price increase. For example, if the price increases by 10%, the quantity demanded will decrease by less than 10%.

Explanation: The variation in price elasticity of demand along a straight-line demand curve is primarily driven by changes in consumer behaviour related to income and the availability of substitutes.

Low Price Points (Elastic Demand): At lower prices, consumers are more sensitive to price changes. This is because the product represents a smaller proportion of their overall income. A small price increase has a relatively large impact on their budget, leading them to switch to alternatives. Furthermore, at lower price points, there are often more readily available substitutes. Consumers can easily switch to a different product if the price increases, resulting in a significant decrease in quantity demanded. Therefore, the demand is elastic.

Higher Price Points (Inelastic Demand): As the price increases, the product becomes a larger proportion of the consumer's income. This makes consumers less responsive to price changes. Even if the price increases, the impact on their budget is smaller. Additionally, at higher price points, there are often fewer readily available substitutes. Consumers may feel they have no alternative but to continue purchasing the product, even if the price rises. Consequently, the demand is inelastic.

In summary: The relationship between price elasticity of demand and income/substitutes explains the shape of the demand curve. Lower prices and more substitutes lead to elastic demand, while higher prices and fewer substitutes lead to inelastic demand.

The information indicates that the price elasticity of demand (PED) is negative and greater than -1. The percentage decrease in quantity demanded (8%) is less than the percentage change in price (which would be positive). Therefore, the absolute value of the PED is greater than 1, meaning the demand is elastic.

Significance of Relative Percentage Changes: The fact that the percentage change in quantity demanded (8%) is less than the percentage change in price indicates that consumers are relatively sensitive to price changes. A small price increase leads to a proportionally larger decrease in quantity demanded.

Size and Sign of the Coefficient: The negative sign confirms the law of demand – as price increases, quantity demanded decreases. The magnitude (absolute value) of the PED being greater than 1 signifies that the demand is elastic. This means that a change in price will have a significant impact on the quantity demanded.

Implications for the Firm: For a firm selling this good, the elastic demand has important implications. If the firm increases the price, the resulting decrease in quantity demanded will lead to a decrease in total revenue. Conversely, if the firm lowers the price, the resulting increase in quantity demanded will lead to an increase in total revenue. The firm needs to carefully consider the cost of producing the good and the potential impact on profit when deciding on a pricing strategy. The firm should consider the elasticity of demand when setting prices to maximize revenue.