From the law of demand, we know that there is an inverse relationship between price and quantity demanded. When price falls, demand rises and vice-versa, other thing remaining constant. Thus, the law of demand only indicates the direction of change in quantity demanded in response to a change in price.
But this does not tell us by how much or to what extent the quantity demanded will change in response to a change in its price. For example, if price falls by 10%, whether demand rises exactly by 10% or more than 10% or less than that is not explained by the law of demand.
It is explained by the elasticity of demand. It is the concept of elasticity of demand which explains the extent to which quantity demanded will change in response to a change in the price of the commodity.
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In ordinary language we understand if a matter is expanded and contracted easily it is called as an elastic matter. If it is not expanded and contracted easily it is either less elastic or inelastic object.
This concept of elasticity is also applicable to demand. Elasticity of demand means the degree of extension and contraction of demand due to changes in price.
Alfred Marshall was the chief architect of elasticity of demand. In the words of Marshall, “The elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given rise in price.”
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In the words of Prof. Boulding, “Elasticity of demand measures the responsiveness of demand to changes in price.” Prof. Samuelson has considered elasticity of demand as a concept devised to indicate the degree of responsiveness of quantity demanded to change in market price.”
Generally, elasticity of demand refers to price elasticity of demand. The following formula is used to measure the price elasticity of demand.
Since price and quantity demanded always move in the opposite direction, the value of price elasticity of demand is always negative. Generally the minus sign is ignored and the value of price elasticity of demand is always expressed in terms of the positive number.