Price Elasticity of Demand — Meaning and Formula

Price Elasticity of Demand ($E_d$) measures the degree of responsiveness of quantity demanded of a commodity to a change in ITS OWN price, all other factors (income, tastes, prices of related goods) remaining constant.

Because the Law of Demand means price and quantity demanded normally move in OPPOSITE directions, the raw value of $E_d$ computed from the formula is negative. Economists, by convention, ignore this negative sign and treat $E_d$ as a positive number, since it is the MAGNITUDE of responsiveness — not the direction, which is already known from the law of demand — that is of interest.

The numerical value of $E_d$ can range from zero to infinity. A value close to zero means quantity demanded barely reacts to a price change (an essential commodity such as salt or life-saving medicine); a very large value means quantity demanded reacts violently to even a tiny price change (a commodity with many close substitutes, such as one brand of biscuit against another). This range is what the next section's five types of price elasticity classify. …