Explain price elasticity of demand.
Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price. It measures how the quantity demanded reacts when the price of the good changes. Some goods are very responsive to price changes while others are not.
Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. The formula is:
eD = (Percentage change in demand) / (Percentage change in price) = (ΔQ/Q) × (P/ΔP)
When the percentage change in quantity demanded is less than the percentage change in price, |eD| is less than one and demand is said to be inelastic. When the percentage change in quantity demanded is more than the percentage change in price, |eD| is more than one and demand is said to be elastic.
Explanation
The textbook defines price elasticity of demand as a measure of responsiveness of demand to price changes. The answer includes the definition, formula, and the distinction between elastic and inelastic demand based on the value of |eD|, all derived directly from the provided context.