Price Elasticity of Demand Formula
Calculate price elasticity of demand with PED = (% Change in Quantity) / (% Change in Price).
Measure how sensitive demand is to price changes.
The Formula
Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes. It helps businesses and economists understand consumer sensitivity to price shifts.
Variables
| Symbol | Meaning |
|---|---|
| PED | Price elasticity of demand (usually a negative number, often expressed as absolute value) |
| % Change in Quantity | ((New Quantity - Old Quantity) / Old Quantity) × 100 |
| % Change in Price | ((New Price - Old Price) / Old Price) × 100 |
Key Ranges
- |PED| > 1 — Elastic: demand is very sensitive to price changes
- |PED| = 1 — Unit elastic: demand changes proportionally with price
- |PED| < 1 — Inelastic: demand barely changes when price changes
Example 1
A coffee shop raises its latte price from $4.00 to $4.50. Daily sales drop from 200 to 170.
% Change in Price = ((4.50 - 4.00) / 4.00) × 100 = 12.5%
% Change in Quantity = ((170 - 200) / 200) × 100 = -15%
PED = -15% / 12.5% = -1.2
|PED| = 1.2 — Demand is elastic. The price increase caused a proportionally larger drop in sales.
Example 2
A gas station raises prices from $3.50 to $3.85 per gallon. Gallons sold drop from 1,000 to 950.
% Change in Price = ((3.85 - 3.50) / 3.50) × 100 = 10%
% Change in Quantity = ((950 - 1000) / 1000) × 100 = -5%
PED = -5% / 10% = -0.5
|PED| = 0.5 — Demand is inelastic. People still need gas even when the price goes up.
When to Use It
Use the price elasticity formula when:
- Deciding whether to raise or lower your prices
- Predicting how a price change will affect total revenue
- Identifying which products are price-sensitive and which are not
- Studying market behavior and consumer demand patterns