Chapter 4, Problem 1QR

To determine

Explain the price elasticity of demand (${\text{E}}_{\text{D}}$).

Explanation of Solution

The percentage change in the quantity demanded of a product due to the percentage change in its price known as price elasticity. Thus, the sensitiveness or responsiveness of demand to change in price is called elasticity of demand. It can calculate using the following formula:

${\text{E}}_{\text{D}}=\frac{\%\text{ change in quantity demanded }}{\%\text{change in price}}$        (1)

As Equation 1 shows, the price elasticity of demand tells us exactly how quantity demanded responds to a change in price. Generally, the value of price elasticity is negative. However, economists just to look at price elasticity of demand as an absolute value. That means, the price elasticity of demand is always expressed as a positive number.