You can use this price elasticity of demand calculator to calculate the price elasticity of demand.
Page written by Ian Hawkins. Last reviewed on July 8, 2024. Next review due April 1, 2025.
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Price elasticity measures how much the quantity demanded of a good or service changes in response to a change in its price. If a small price change leads to a significant change in demand, the product is considered elastic. If demand hardly changes, it’s inelastic. Understanding price elasticity helps businesses make informed pricing decisions and predict how changes in price could impact their sales and revenue.
Learn more about the law of demand here.
Price elasticity of demand refers to the measure of the sensitivity of the quantity demanded for a product or service to changes in its price. It reflects how responsive consumers are in adjusting their demand when the price of a product or service changes.
There are three main types of price elasticity:
Elastic demand: This occurs when a small change in price leads to a relatively larger change in quantity demanded. In other words, consumers are highly responsive to price changes, and a price increase results in a significant decrease in demand, while a price decrease leads to a substantial increase in demand. The elasticity coefficient in this case is greater than 1.
Inelastic demand: In contrast to elastic demand, inelastic demand describes a situation where a change in price has a relatively smaller impact on quantity demanded. Consumers are less responsive to price changes, and demand remains relatively stable even when prices fluctuate. The elasticity coefficient in this case is less than 1.
Unitary elastic demand: Unitary elastic demand occurs when a change in price results in an equivalent percentage change in quantity demanded. In this case, the elasticity coefficient is equal to 1. The percentage change in quantity demanded matches the percentage change in price.
The formula for calculating price elasticity of demand (PED) is:
PED = Percentage change in quantity demanded/Percentage change in price
Or in a more detailed form:
PED = (Q2−Q1/Q1) / (P2−P1/P1)
Where:
A high price elasticity means that a small change in price leads to a significant change in the quantity demanded. Products with high price elasticity are usually non-essential goods or those with many substitutes.
Think of price elasticity as a measure of how much people react to a price change. If a small price drop makes lots of people rush to buy a product, that product is considered price elastic. Conversely, if people keep buying the same amount regardless of price changes, the product is price inelastic.
A price elasticity of 1.5 means the product is elastic. For every 1% change in price, the quantity demanded changes by 1.5%. This indicates that demand is quite responsive to price changes.
A "good" price elasticity depends on your business goals. For essential goods, a low price elasticity (less than 1) is ideal because demand remains steady despite price changes. For non-essential or luxury items, a higher price elasticity (greater than 1) can be advantageous, as it allows for more strategic pricing to maximize revenue without significantly affecting sales volume. Understanding your product's price elasticity helps tailor pricing strategies to market demand.
A few of the many factors include:
Availability of substitutes: More substitutes mean higher elasticity because consumers can easily switch to alternatives.
Necessity vs. luxury: Necessities tend to have inelastic demand, while luxuries are more elastic.
Proportion of income: Goods that take up a larger portion of income usually have more elastic demand.
Timeline: Demand elasticity can vary over time. In the short term, demand is often inelastic, but it becomes more elastic in the long term as consumers find alternatives or adjust their behaviour.
Brand loyalty in the market: Strong brand loyalty can make demand more inelastic, as consumers are less likely to switch to substitutes.
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