Is there an intuitive way to understand why this is so. I want this explained in a layman's terms. I know negative means they are inversely related, which is what you would expect most items to follow. The cheaper the price, the more demanded.
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$\begingroup$ Ceteris paribus is very ill-defined in this question. Are we comparing different price levels and one utility function or one price level and different utility functions? $\endgroup$– GiskardSep 5, 2016 at 15:24
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The price elasticity of demand measure how sensitive the consumer is in their demand to a change in price.
If the elasticity is really large (in negative terms), then a 1% change in price results in a large % change in quantity demanded.
So as the elasticity gets closer to 0, the sensitivity of the consumer is reduced.
The less sensitive the consumer is, the less they will change their demand if the firm charges more, so the company could increase price a little and demand won't go down very much, leading to potentially higher profits. This occurs when demand is inelastic.
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$\begingroup$ Ceteris paribus is very ill-defined in this question and in the answer as well. Are we comparing different price levels and one utility function or one price level and different utility functions? $\endgroup$– GiskardSep 5, 2016 at 15:20