Demand responds to price changes in varying degrees. Price elasticity measures that responsiveness. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the absolute value is greater than one, demand is elastic—quantity changes more than proportionally. If less than one, demand is inelastic.

Elastic demand is typical for products with close substitutes or for non-essential items. Inelastic demand is typical for necessities, addictive goods, or products with few substitutes. Knowing the elasticity helps firms predict the revenue effect of a price change: raising price increases revenue when demand is inelastic and decreases it when demand is elastic.

Elasticity is estimated from historical data, experiments, or surveys. It can differ by segment, by time horizon, and by the size of the price change. Pricing decisions that ignore elasticity risk unexpected drops in volume or missed opportunities to capture value. The concept remains one of the most practical applications of microeconomics to everyday business.