How is price elasticity of demand calculated?

• A. Price change divided by quantity change
• B. Percentage change in quantity demanded divided by percentage change in price
• C. Demand change divided by supply change
• D. Quantity change divided by total revenue

Answer: (B)

The price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. It is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in price. This process allows economists to understand how consumers react to price changes.

When demand is elastic, a small change in price leads to a larger change in quantity demanded, indicating that consumers are sensitive to price changes. Conversely, if demand is inelastic, a change in price results in a smaller change in quantity demanded. The formula provides a straightforward way to quantify these changes, which is crucial for pricing strategies, taxation decisions, and understanding consumer behavior.

In contrast, other options do not correctly represent the calculation used for price elasticity of demand. For instance, dividing price change by quantity change or considering demand change against supply change does not yield a meaningful or useful measure of elasticity. Therefore, the formula involving percentage changes is the correct approach for capturing the relationship between price and quantity demanded.