This tool quantifies the responsiveness of the quantity demanded of a good or service to a change in its price. It provides a numerical value representing the percentage change in quantity demanded divided by the percentage change in price. For instance, a value of -2 suggests that a 1% increase in price leads to a 2% decrease in quantity demanded.
Understanding this measure is crucial for businesses in setting optimal pricing strategies and forecasting sales revenue. It allows for informed decisions regarding price adjustments and promotional campaigns. Knowledge of this concept has evolved with the formalization of economic principles, becoming an essential element in contemporary economic analysis and business planning.