The quantity demanded generally decreases when the
price increases, so this ratio is usually expected to be
negative. For example, if a 10% increase in the price of
good A results in a 6% fall in the quantity demanded of
that good, its own price elasticity is -0.6. By contrast, if a
10% fall in the price of good B leads to a 12% increase in
the quantity demanded of good B, its own price elasticity
is -1.2.
Goods with elasticities less than one in absolute value
are commonly referred to as having inelastic or price
insensitive demand. In other words, the proportional
change in quantity demanded will be less than the
proportional change in price. In this situation, increasing
the price will increase the revenue received by the
producer of the good, since the revenue lost by the
decrease in quantity is less than the revenue gained from
the higher price.
Goods with elasticities greater than one in absolute
value are referred to as having elastic or price sensitive
demand. In other words, the proportional change in
quantity demanded will be greater than the proportional
change in price. A price increase will result in a revenue
decrease to the producer since the revenue lost from
the resulting decrease in quantity sold is more than the
revenue gained from the price increase.