Demand elasticity, often referred to as price elasticity of demand, measures how sensitive the quantity demanded of a good or service is to a change in its price. It quantifies the percentage change in quantity demanded in response to a one percent change in price. The formula for price elasticity of demand (Ed) is:

\[ Ed = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} \]

The concept of demand elasticity helps economists, businesses, and policymakers understand how changes in price affect consumer behavior and total revenue. The value of demand elasticity can be categorized into different types:

1. **Elastic Demand (Ed > 1):**
– If the price elasticity of demand is greater than 1, the demand is considered elastic. In this case, the percentage change in quantity demanded is relatively greater than the percentage change in price. An increase in price will lead to a proportionally larger decrease in quantity demanded, and vice versa. Total revenue moves in the opposite direction of price changes.

2. **Inelastic Demand (0 < Ed < 1):** - If the price elasticity of demand is between 0 and 1, the demand is considered inelastic. In this scenario, the percentage change in quantity demanded is relatively smaller than the percentage change in price. A change in price has a smaller impact on the quantity demanded, and total revenue moves in the same direction as price changes.3. **Unitary Elasticity (Ed = 1):** - When the price elasticity of demand is equal to 1, it is termed unitary elasticity. In this case, the percentage change in quantity demanded is exactly equal to the percentage change in price. Total revenue remains constant as price changes.4. **Perfectly Elastic Demand (Ed = ∞):** - Perfectly elastic demand occurs when a small change in price results in an infinite percentage change in quantity demanded. Consumers are extremely sensitive to price changes, and any increase in price would lead to a complete loss of demand.5. **Perfectly Inelastic Demand (Ed = 0):** - Perfectly inelastic demand occurs when a change in price has no impact on the quantity demanded. The quantity demanded remains constant regardless of price changes. In this extreme case, total revenue moves in the same direction as price changes.Factors influencing demand elasticity include:- **Substitutability:** - The availability of substitutes affects demand elasticity. If close substitutes are available, demand tends to be more elastic because consumers can easily switch to alternatives.- **Necessity vs. Luxury:** - Necessities tend to have inelastic demand because consumers require them regardless of price changes. Luxuries, on the other hand, often have more elastic demand.- **Time Horizon:** - Demand elasticity can vary over different time horizons. In the short run, consumers may be less responsive to price changes, but in the long run, they may find alternatives, making demand more elastic.- **Definition of the Market:** - The way the market is defined can impact demand elasticity. For example, demand for a specific brand may be more inelastic than demand for the broader category of products.Understanding demand elasticity is crucial for businesses in setting prices, forecasting sales, and making strategic decisions. It also has implications for policymakers when considering the impact of taxes or subsidies on consumer behavior and government revenue.