Price elasticity of demand is a measure of how sensitive consumers are to changes in price of goods or services.The formula is the percent change in quantity demanded divided by the percent change in price.Usually the midpoint formula is used to calculate price elasticity of demand.

Price elasticity of demand = (Q2 - Q1)/[(Q1 + Q2)/2] / (P2 - P1)/[(P1 + P20)/2]

Price elasticity of demand is measured from the demand curve.Since consumers demand exhibits an inverse relationship to price, price elasticity of demand ratio is negative.However, in practice, economists take the absolute value and compare results to one.If price elasticity of demand is greater than one, consumer demand is price elastic.If price elasticity of demand is less than one, consumer demand is inelastic.Finally, if price elasticity of demand is equal to one, consumer demand is unit elastic.

Price elasticity of supply is a measure of how sensitive producers are to changes in prices for goods and services they supply.The formula is the percent change in quantity supplied divided by the percent change in price.Usually, the midpoint formula is used to calculate price elasticity of supply.

Price elasticity of Supply = (Q2 - Q1)/[(Q1 + Q2)/2] / (P2 - P1)/[(P1 + P20)/2]

Notice price elasticity of supply formula is the same as price elasticity of demand.The only difference is that price elasticity of supply is measured from the supply curve.Since producers have a direct relationship between quantity supplied and price, the ratio always works out positive.Similarly, price elasticity of supply ratio is compared to one to gauge whether supply is elastic, inelastic, or unit elastic.

Income elasticity of demand is a measure of how sensitive consumer demand is to changes in income for goods and services.Income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.

If income elasticity of demand works out to a positive ratio, the good is a normal good.In other words, as income rises, consumers purchase more of the good in question.On the other hand, if the ratio is negative, the good is inferior.As incomes rise, consumers purchase less of the good in question.Please note inferior goods does not imply the goods are poor in quality.

Examples of inferior goods include spam and Ramen noodles.As incomes rise, consumers are less inclined to buy more spam or Ramen noodles.People can afford to buy healthier and more nutritious food to eat with larger incomes.

How does revenue for a business respond to changes in price elasticity of demand? Do companies respond effectively to changes in price elasticity of demand from their customers?