How is price elasticity calculated?

Price elasticity is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in price. This formula helps to measure the responsiveness of consumers to price changes. If the price elasticity is greater than one, it indicates that demand is elastic, meaning consumers are quite sensitive to price changes. If it is less than one, demand is inelastic, showing that consumers are less responsive to price variations.

Understanding this concept is crucial for businesses when they are setting prices or creating pricing strategies. Knowing how changes in price will affect the quantity demanded can lead to more informed decisions about pricing and potential revenue impacts. This understanding allows marketers to anticipate consumer behavior in relation to price adjustments, thus planning accordingly for promotions, discounts, or price increases.