A company increases the price of its product by 10%, and as a result, the quantity demanded decreases by 20%. Which category best describes the elasticity of demand for this product, and why?

The elasticity of demand measures how much the quantity demanded of a product changes when its price changes. In this case, when the company raised the price by 10%, the quantity demanded dropped by 20%. To find the elasticity, we can divide the percentage change in quantity demanded (-20%) by the percentage change in price (10%), which gives us -2. This means the demand is elastic because the absolute value is greater than 1, indicating that consumers are quite sensitive to price changes. For example, if a product like a luxury watch becomes more expensive, many people might choose not to buy it, showing that demand is elastic.