The elasticity coefficient is a number that indicates the percentage change that will occur in one variable (y) when another variable changes one percent.
It is defined as the ratio:
( %change in y ) / ( %change in x )
If y is quantity demanded and x is price, then the ratio represents the price-elasticity coefficient, which indicates the percentage change in quantity as price changes 1%. If x is income then the number becomes the income-elasticity coefficient.
Price elasticity is important in business to determine in a given market whether an increase (or decrease) in prices will generate an increase (or decrease) in revenues.
The following cases are possible for the price elasticity coefficient (given that the relationship between quantity demanded and price is expected to be negative, we focus on the absolute value of the elasticity coefficient).
Elasticity coefficient - Values and interpretation
E > 1 - In this case price and revenues move in opposite directions. An increase in prices generates an opposite change in quantity demanded that more than offsets the change in price. Therefore, revenues decrease.
E = 1 - Small changes in price do not modify revenues.
E < 1 - In this case price and revenues move in the same direction. An increase (decrease) in prices generates an opposite smaller change in quantity demanded (in percentage terms). Therefore, revenues increase (decrease).