Final answer:
When a price change significantly affects product sales, demand is considered elastic, whereas if there is little impact, demand is inelastic. The answer is 1) elastic, inelastic. Elastic demand reflects a high consumer response to price changes, while inelastic demand shows low responsiveness.
Step-by-step explanation:
If price changes significantly impact product sales, demand for the product is said to be elastic. If the change in price does not greatly impact sales, demand is inelastic. Therefore, the correct answer to the question is: 1) elastic, inelastic.
Elastic demand is when consumers are highly responsive to changes in price. This often occurs with non-essential or luxury items. For example, if the price of a luxury car were to decrease, more consumers might decide to purchase it due to the lower price. Conversely, inelastic demand indicates that consumers are less responsive to price changes. This is typical for essential goods or necessities; for instance, consumers will continue to purchase the same amount of prescription medicine regardless of a slight increase in price.
Understanding the concept of price elasticity is crucial for businesses. It helps them determine how a change in price might affect their total revenue. If the elasticity is greater than one, lowering prices could lead to an increase in total revenue, while an elasticity less than one suggests that raising prices could be more beneficial for revenue.