Price elasticity is an economics term that refers to the way that price changes of stock can affect the demand for that stock. You can calculate this exactly whenever stock changes price and there is a corresponding increase or decrease in sales. The percentage of price elasticity will measure how rapidly the market responds to price changes.
First, you will need to know two basic quantities in order to find out what the price elasticity of a stock (or the entire market as a whole) is. You need to know how the demand has changed for a particular item. You can determine this based on how many shares of the stock in question have been sold. Then, you’ll also need to know how much the price has changed.
Just divide the change in demand for the stock (or stock in general) by how much the price(s) have changed. Once you get this value, you will know the price elasticity. Then, you can use this information to figure out several things about the stock or stock market.
If the price elasticity is higher than one, then this means that the stock is price elastic. When the price changes, there is a high corresponding response in number of stocks traded on the market. If the price elasticity is exactly equal to one, then that means that the stock is unit elastic, but that result is relatively rare. It is more common for the price elasticity to be lower than one. This means that the price is inelastic, and price changes will not have a corresponding effect on the number of shares sold.
There are a few things that make price elasticity hard to measure, of course. These are things that will affect how much the market depends on current prices. For example, program trading will lower the price elasticity of a market due to the fact that most program trading will occur regardless of what happens to the price of stock in the mean time. Bad price elasticity can also cause stock bubbles and other phenomena that will have detrimental effects in the long run.