If we place so much emphasis on the sign, why is it ignored?

The reason why the sign is important is that it is the sign that will tell us whether the good is a Normal Good, or a Giffen Good, or an Inferior Good.

How does it do this?

Remember that the sign for Normal Goods is always negative if we are talking about Price Elasticity of Demand.

As the price increases (plus), there will be a decrease (minus) in the quantity demanded. Therefore, in the formula, there will be a minus change in quantity divided by a plus change in price (or a plus change in quantity divided by a minus change in price). A plus by a minus will always give a minus. Therefore PRICE ELASTICITY OF DEMAND for Normal Goods is always negative.

The converse is true for Giffen Goods. An increase in price will bring about an increase in the quantity demanded (or a decrease in price will result in a decrease in quantity demanded). A plus by a plus will give a plus, a minus by a minus will also give a plus. Therefore if we are talking about PRICE ELASTICITY OF DEMAND, if the sign is positive the goods in question are Giffen Goods.

The sign is also used to differentiate between Normal Goods and Inferior Goods when we are dealing with Income Elasticity of Demand. More of a Normal Good tends to be purchased if the national level of Income rises - this gives a plus by a plus which equals a plus. Less of a Normal Good tends to be purchased if the national level of Income falls - this gives a minus by a minus, which also gives a plus. Therefore INCOME ELASTICITY OF DEMAND for Normal Goods is always positive.

Likewise, the opposite is true for Inferior Goods. As national income levels rise, we tend to purchase less of Inferior Goods, and vice versa. A plus (increase in income levels) by a minus (decrease in demand for Inferior Goods) gives a minus. Therefore INCOME ELASTICITY OF DEMAND for Inferior Goods is always negative.

In discussing Cross Elasticity of Demand, you will see that the sign will show whether the goods are Substitute or Complementary Goods. Substitute Goods will always have a positive sign, and Complementary Goods will always have a negative sign.

Two points arise from this question.

The importance of the Sign is that it will show us whether the good in question is Normal, Giffen, or Inferior.

So, why do we ignore the Sign?

The sign is ignored because we only need to know the absolute value of the number. Having established whether the goods are Normal, or Giffen, or Inferior, we know how they are going to react with respect to a price change. Therefore, the sign serves no further useful purpose and can be ignored.

What we need to know now is not the direction (up or down) of the change in quantity, but the size of the change.

This brings us back to our "earth-shattering" statement that all numbers are less than, equal to, or greater than one.

The nearer the absolute number is to zero, the more inelastic it is - it will remain inelastic for as long as it is less than zero. Unity, of course, is the one-to-one relationship between price and quantity - as price increases by 1% demand will decrease by 1%. Any absolute number greater than one is treated as being elastic - a 1% increase in price will bring about a greater than 1% decrease in demand.

Examination Tip:

If the result of the formula when we are calculating PRICE ELASTICITY OF DEMAND turns out to be +1 (in other words, unity for Giffen Goods), total revenue will not remain constant. A 1% increase in price will bring about a 1% increase in demand - which means, of course, that total revenue is going to increase! One per cent more is being sold, and at a one per cent higher price.

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