What does it indicate if demand is elastic?

When demand is considered elastic, it signifies that consumers are highly responsive to changes in price. This responsiveness is quantified by the elasticity value; when this value exceeds 1, it indicates a proportionality where a small price change results in a relatively larger change in the quantity demanded.

For instance, if the price of a product increases by 10% and the quantity demanded decreases by 20%, the elasticity would be calculated as the percentage change in quantity divided by the percentage change in price, yielding an elasticity greater than 1. This illustrates that consumers are quick to adjust their purchasing behavior in response to price fluctuations, often seeking alternatives or reducing consumption when prices rise.

Understanding demand elasticity is crucial for businesses and policymakers; it helps in making decisions regarding pricing strategies, tax policies, and anticipating consumer behavior in various economic conditions.