1. What is Price Elasticity?

Price elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. It is a dimensionless number that indicates the percentage change in quantity demanded resulting from a 1% change in price.

2. How Does the Calculator Work?

The calculator uses the price elasticity formula:

Where:

• \( E \) — Price elasticity of demand (dimensionless)
• \( \%\Delta Q \) — Percentage change in quantity demanded
• \( \%\Delta P \) — Percentage change in price

Interpretation:

• |E| > 1: Elastic demand (quantity responds strongly to price changes)
• |E| < 1: Inelastic demand (quantity responds weakly to price changes)
• |E| = 1: Unit elastic demand (proportional response)

3. Importance of Price Elasticity

Details: Understanding price elasticity helps businesses set optimal pricing strategies, predict revenue changes, and understand consumer behavior. It is crucial for pricing decisions, tax incidence analysis, and market analysis.

4. Using the Calculator

Tips: Enter percentage changes for both price and quantity. Positive values indicate increases, negative values indicate decreases. The calculator will compute the elasticity coefficient and classify the demand type.

5. Frequently Asked Questions (FAQ)

Q1: What does E = -2 mean?
A: E = -2 indicates elastic demand. A 1% price increase leads to a 2% decrease in quantity demanded.

Q2: Why is elasticity usually negative?
A: Due to the law of demand, price and quantity typically move in opposite directions, resulting in negative elasticity values.

Q3: What factors affect price elasticity?
A: Availability of substitutes, necessity vs luxury, time horizon, and proportion of income spent on the good.

Q4: How is elasticity used in business?
A: For pricing strategies, revenue forecasting, and understanding competitive positioning in the market.

Q5: What is perfectly inelastic demand?
A: When E = 0, quantity demanded does not change at all when price changes (e.g., essential medicines).