How is elasticity of demand calculated?

The calculation of the elasticity of demand focuses on the responsiveness of quantity demanded to changes in price. It is specifically determined by measuring how much the quantity demanded of a good responds to a change in its price. The correct approach involves taking the percentage change in quantity demanded and dividing it by the percentage change in price. This formula provides a numerical value that indicates whether demand is elastic or inelastic, guiding how consumers will react to price changes.

This definition is essential in various market contexts, especially when evaluating how significant price fluctuations will affect consumer behavior. A high elasticity indicates that consumers are very responsive to price changes, while a low elasticity suggests they are less responsive. It's a crucial concept for businesses and policymakers alike, as it helps in understanding market strategies and consumer choices.