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How strongly does demand respond to a price change?

Price elasticity compares percentage changes in quantity demanded and price.

A price change can produce a large or small response in quantity demanded. Price elasticity describes the size of that response using percentage changes, which lets us compare goods measured in different units.

In a simplified calculation, a 10% price increase paired with a 20% fall in quantity gives an elasticity of −2, often discussed using its magnitude of 2. The measurement depends on the market, time period and method. Observing sales after a price change also requires asking what else changed.

A small example

If a shop raises a price during a seasonal drop in demand, the entire fall in sales cannot automatically be attributed to the new price.

Keep in mind

Elasticity is not a fixed rule for every customer. The numerical example uses a simple percentage calculation.

Source & attribution

Principles of Economics 3e — Price Elasticity of Demand and Price Elasticity of Supply

OpenStax contributors · OpenStax, Rice University

CC BY 4.0. Rewritten as a self-contained explanation; the example and reflection are Vakataka additions. Written and edited with AI assistance. No source images reproduced.

Source edition: 2024-07-18T12:52:27Z

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