Price Elasticity

In economics, price elasticity is a measure of how demand for a good or service changes in relation to price changes. More specifically, it is a measure of how much the quantity demanded of a good or service changes in response to a change in price.

There are two types of price elasticity: absolute and relative. Absolute price elasticity measures the percentage change in quantity demanded in response to a one percent change in price. Relative price elasticity measures the percentage change in quantity demanded in response to a one percent change in relative prices (i.e., the difference between the prices of two goods).

Elasticity is important because it helps us understand how demand will respond to changes in prices. For example, if demand is perfectly elastic (i.e., perfectly responsive to changes in prices), then a small increase in price will lead to a large decrease in quantity demanded. On the other hand, if demand is perfectly inelastic (i.e., unresponsive to changes in prices), then a small increase in price will lead to only a small decrease (or even an increase) in quantity demanded. In general, the more elastic the demand for a good or service, the more sensitive consumers are to changes in prices.