Price Elasticity of Demand
Price elasticity of demand formula measuring how quantity demanded responds to price changes.
Includes midpoint method.
The Formula
PED = (% Change in Quantity Demanded) / (% Change in Price)
PED = (ΔQ/Q) / (ΔP/P)
PED = (ΔQ/Q) / (ΔP/P)
Midpoint Method (More Accurate)
PED = [(Q₂ − Q₁) / ((Q₂ + Q₁)/2)] / [(P₂ − P₁) / ((P₂ + P₁)/2)]
The midpoint method gives the same result regardless of direction of the price change, making it more reliable for comparisons.
Variables
| Symbol | Meaning |
|---|---|
| PED | Price Elasticity of Demand (usually negative, often reported as absolute value) |
| ΔQ | Change in quantity demanded |
| Q | Original quantity demanded |
| ΔP | Change in price |
| P | Original price |
Interpreting Elasticity
| |PED| Value | Classification | Meaning |
|---|---|---|
| > 1 | Elastic | Quantity changes more than price (luxury goods) |
| = 1 | Unit Elastic | Quantity changes proportionally to price |
| < 1 | Inelastic | Quantity changes less than price (necessities) |
| = 0 | Perfectly Inelastic | Quantity does not change at all |
| = ∞ | Perfectly Elastic | Any price increase causes demand to drop to zero |
Example 1 — Basic Elasticity
Price rises from $10 to $12. Quantity drops from 100 to 80 units. Find PED.
% Change in Q = (80 − 100) / 100 = −20%
% Change in P = (12 − 10) / 10 = +20%
PED = −20% / 20% = −1.0
|PED| = 1.0 → Unit Elastic
Example 2 — Midpoint Method
Price rises from $4 to $6. Quantity drops from 200 to 150. Use the midpoint method.
% Change Q = (150 − 200) / ((150 + 200)/2) = −50 / 175 = −28.57%
% Change P = (6 − 4) / ((6 + 4)/2) = 2 / 5 = 40%
PED = −28.57% / 40%
|PED| = 0.71 → Inelastic (quantity is not very responsive to price)
When to Use It
- Pricing strategy: should you raise or lower prices to increase revenue?
- If demand is elastic (|PED| > 1): lower prices increase total revenue
- If demand is inelastic (|PED| < 1): raising prices increases total revenue
- Tax policy: understanding how taxes affect consumption of different goods