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  • Price Elasticity of Demand

Defining and Calculating Price Elasticity of Demand

Price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. It is calculated as the percentage change in quantity demanded resulting from a 1% price increase. The formula is represented using the Greek letter epsilon (ε):

ε=−% change in demand% change in price\varepsilon = -\frac{\% \text{ change in demand}}{\% \text{ change in price}}

Due to the law of demand, an increase in price leads to a decrease in quantity demanded, making the ratio of percentage changes inherently negative. The minus sign is included in the formula by convention to convert this result into a positive number, which makes the measure of responsiveness easier to interpret.

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