Price Elasticity of Demand
What is Price Elasticity of Demand?
How strongly the quantity people buy responds to a change in price.
Understanding Price Elasticity of Demand
Price elasticity of demand compares the percentage change in quantity demanded with the percentage change in price. Demand is elastic when buyers respond strongly and inelastic when they barely respond.
Goods with close substitutes or that are luxuries tend to be elastic; necessities with few substitutes, like medicine or gasoline in the short run, tend to be inelastic.
Formula
Example
If a 10% price rise cuts sales by 20%, elasticity is about −2: demand is elastic, and the price rise lowers total revenue.