How is price elasticity of demand defined and calculated?

Answer:
Price elasticity of demand measures the responsiveness of quantity demanded for a good or service to a change in price, ceteris paribus. Use the formula,

Percentage change in quantity demanded
Percentage change in price

This is a calculation area, so try these questions for practice: (Don't peek at the answers until you find out what you don't know!)

1. What is the elasticity of demand if a CD shop decreases the price of a CD from $20 to $10 , and this increases the quantity purchased from 0 to 20 per hour?
2. If the elasticity of demand for a firm's product is 1.5, what will happen if the price is reduced by 5 percent?
3. If the elasticity of demand for a firm's product is 0.5, what is the result of the change to quantity sold if the price is increased by 10 percent?

Calculations:

1. 20/10 divided by 10/15 = 2 over 0.67 = 3
   (mid-point method was used)
2. 1.5 = x over 5%
   x = 7.5% increase in quantity demanded
3. 0.5 = x over 10%
   x = 5% decrease in quantity demanded