Elasticity of Demand: 

The law of demand states that if price rises, the quantity demanded falls and vice versa. However, it is necessary to see how much the quantity demanded changes. This concept is the price elasticity of demand. The price elasticity of demand measures how responsive demand is to changes in price.

Price elasticity of demand is defined by the equation:

Price elasticity of demand(ED) = Percentage change in quantity demanded/ Percentage change in price

Because an increase in price creates a decrease in quantity demanded, this ratio between the changes will be negative. The quantity demanded and the good's price always moves in opposite directions. However it is the magnitude of changes is what is important, not their direction. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

If Price elasticity of demand is greater than 1(PEoD > 1) then demand is relatively price Elastic (Demand is sensitive to price changes)

If Price elasticity of demand is equal to 1(PEoD = 1) then Demand is Unit Elastic

If Price elasticity of demand is less than 1(PEoD < 1) then Demand is Price Inelastic (Demand is not sensitive to price changes)

The negative sign is usually ignore when analyzing price elasticity, so PEoD is always positive.

Generally, price elastic of demand is the responsiveness of the demand for a good or service to the increase or decrease in its price. In general, sales increase with fall in prices and decrease with rise in prices. As a rule, non-essentials goods show elasticity of demand whereas most necessities (food, medicine, basic clothing) show inelasticity of demand (do not sell significantly more or less with changes in price). The effect of taxes on the elasticity of demand also needs to be considered because taxes have important implications on the elasticity of demand. Another important relationship is that between the elasticity of demand and total revenue.