priceelasticity

Price elasticity of demand, commonly called price elasticity, measures how the quantity demanded of a good or service responds to changes in its price. It can be defined for a specific point on the demand curve or averaged over a price range. The concept helps explain how price movements influence consumer purchasing behavior and, in turn, market outcomes.

For demand, elasticity is typically negative due to the inverse relationship between price and quantity demanded, but it is usually reported as an absolute value. A value greater than one indicates elastic demand, meaning quantity responds strongly to price changes; a value less than one indicates inelastic demand, with a weaker response; a value equal to one indicates unitary elasticity. Elasticity can also be measured for supply, where the relationship between price and quantity supplied is generally positive.

Point elasticity is defined as E_d = (dQ/dP) * (P/Q). Arc (or midpoint) elasticity uses average values to approximate changes over a price interval: E_d^arc = (ΔQ/ΔP) * (P_avg/Q_avg). These measures describe responsiveness at a specific point or over a range.

Determinants of price elasticity of demand include availability of substitutes, the portion of income spent on the good, whether the good is a necessity or a luxury, and the time horizon considered. Market definition also matters, as broader definitions usually yield smaller elasticities.

Applications include pricing strategy, tax incidence analysis, and welfare assessment. Elasticities aid in forecasting revenue changes and consumer welfare but depend on context and holding other factors constant.