SQA National 5 Economics Practice Exam

When a product’s price elasticity of demand is measured at 2, it indicates that the demand for that product is elastic. This means that the quantity demanded changes significantly in response to a price change. Specifically, a price elasticity of 2 means that for every 1% increase in price, the quantity demanded decreases by 2%.

Elastic demand typically occurs for products that have substitutes or are not necessities, allowing consumers to easily reduce their consumption or switch to alternatives when prices rise. Understanding the concept of elasticity helps businesses and policymakers to predict how changes in prices will affect overall demand for a product, which is critical for making informed pricing and production decisions.

In this context, other options do not apply since they describe either inelastic demand (where consumers are less responsive to price changes), unitary elasticity (where the percentage change in quantity demanded is equal to the percentage change in price), or a completely unresponsive demand scenario (where changes in price do not affect the quantity demanded at all).