How will consumers respond to a price change? Sales will increase if price falls, but by how much? Will a higher price lead most people to buy a substitute instead? And if they do, is it possible that the seller's revenue might actually decrease? The price elasticity of demand, E_d, is a measure of buyer responsiveness to price changes. It equals the ratio of the percentage change in quantity demanded to the percentage change in the price. If the quantity change exceeds the price change in percentage terms, E_d is greater than one (in absolute value) and we say demand is elastic. Demand is inelastic if the quantity change is less than the price change in percents; E_d is less than one. The elasticity of demand varies from one product to another. It may even vary for the same product: demand for a product may be more elastic at high prices than at low prices and is usually more elastic in the long run than in the short run.

The graph illustrates the demand for soft drinks at a large grocery store. At the current price of $3, sales are 3000 cases per week, generating total sales revenue of $9,000. By dragging the green price triangle on the demand curve, you can observe the relationship between the price, quantity demanded, and total revenue. Click on the Elasticity button to calculate the price elasticity over the selected range of the demand curve.