Which formula defines price elasticity of demand?

• A. The change in the quantity demanded divided by the change in price.
• B. The percentage change in the price divided by the percentage change in the quantity demanded.
• C. The change in the price divided by the change in quantity demanded.
• D. % Change in the quantity demanded divided by the percentage change in the price.

Answer: (D)

Price elasticity of demand shows how much quantity demanded responds to a price change, and it does so using percentage changes in both variables. The standard definition is the percentage change in quantity demanded divided by the percentage change in price. This makes the measure unitless and comparable across goods. For example, if price goes up by 10% and quantity demanded falls by 20%, elasticity is -20% divided by 10%, or -2, indicating a fairly responsive demand. Often we look at the magnitude, so we’d say the elasticity is 2 (the sign shows the inverse relationship). The other formulations aren’t the same: using raw changes in quantity over price gives a slope, not elasticity; swapping the numerator and denominator yields the reciprocal; and putting percentage price change over percentage quantity change reverses the ratio.