Price Elasticity of Demand
Plain definition
Price elasticity of demand measures how much quantity demanded responds to a price change: (percentage change in quantity demanded) divided by (percentage change in price). Demand is elastic when the value exceeds 1 in absolute terms, inelastic when below 1, and unit-elastic at exactly 1.
In economics
This is the single most used elasticity in business and policy. It determines whether a price rise increases revenue (inelastic demand) or decreases it (elastic demand), and it shapes the deadweight loss of taxes: the more elastic the demand, the bigger the distortion from any given tax.
Example
If raising the price of branded sneakers by 20 percent cuts sales by 30 percent, price elasticity is 1.5 in absolute value — elastic demand, so the price rise reduces total revenue. For salt, the same 20 percent price rise might cut sales by only 2 percent (elasticity 0.1, inelastic), so revenue rises.
Students mix up the sign and the label. Demand elasticity is negative (price and quantity move oppositely), but we classify using the absolute value: -1.5 is elastic, -0.3 is inelastic. Saying an elasticity of -0.3 is more elastic than -1.5 is wrong — compare absolute values, not the signed numbers.