How is price elasticity of demand calculated?

Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. It is calculated using the formula that divides the percentage change in quantity demanded by the percentage change in price. This approach captures the responsiveness of consumers to price changes, allowing economists and businesses to understand how demand will react in different pricing scenarios.

For instance, if the price of a product increases and the quantity demanded falls significantly, the price elasticity of demand will yield a value greater than one, indicating that the demand is elastic. Conversely, if the quantity demanded changes only slightly with a price change, the elasticity would be less than one, reflecting inelastic demand. Understanding this concept is crucial for setting pricing strategies, analyzing market scenarios, and making informed economic decisions.

The other options do not accurately describe the calculation of price elasticity of demand. Evaluating total revenue changes over time does not specifically focus on the relationship between price and quantity demanded. Dividing total sales by the initial price does not relate to the changes in quantity or price but rather gives a figure related to sales volume. Lastly, multiplying the change in price by quantity supplied describes a different economic concept related to supply rather than the elasticity of demand.