Price elasticity of demand is defined as

Price elasticity of demand is defined as

• A. The percentage change in quantity demanded divided by the percentage change in price
• B. The percentage change in price divided by the percentage change in quantity demanded
• C. The percentage change in quantity supplied divided by price
• D. The ratio of income to price

Answer: (A)

Price elasticity of demand shows how much buyers change the quantity they buy when the price changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Because demand usually falls when price rises, the elasticity is negative, though we often talk about the absolute value to describe how strong the response is. For example, a 10% drop in price leading to a 20% rise in quantity demanded gives an elasticity of -2, indicating very elastic demand. The magnitude tells how sensitive buyers are to price changes. The other options mix up which variable changes and how the ratio is formed, or rely on quantity supplied or income rather than price and quantity demanded.

Price elasticity of demand shows how much buyers change the quantity they buy when the price changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Because demand usually falls when price rises, the elasticity is negative, though we often talk about the absolute value to describe how strong the response is. For example, a 10% drop in price leading to a 20% rise in quantity demanded gives an elasticity of -2, indicating very elastic demand. The magnitude tells how sensitive buyers are to price changes. The other options mix up which variable changes and how the ratio is formed, or rely on quantity supplied or income rather than price and quantity demanded.