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Price Elasticity of Demand (PED)
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Price Elasticity of Demand Explained
Price elasticity of demand (PED) measures how sensitive consumers are to a price change. A high PED means consumers quickly reduce purchases when prices rise (elastic demand). A low PED means they buy roughly the same amount regardless of price (inelastic demand).
PED Formula
PED = (% Change in Quantity) ÷ (% Change in Price)
Standard: PED = ((Q2−Q1)/Q1) ÷ ((P2−P1)/P1)
Midpoint: PED = ((Q2−Q1)/((Q1+Q2)/2)) ÷ ((P2−P1)/((P1+P2)/2))
Example: Price rises from $10 → $12 (+20%), quantity falls 1,000 → 800 (−20%):
PED = −20% ÷ 20% = −1.0 (Unit Elastic)
Midpoint: PED = ((Q2−Q1)/((Q1+Q2)/2)) ÷ ((P2−P1)/((P1+P2)/2))
Example: Price rises from $10 → $12 (+20%), quantity falls 1,000 → 800 (−20%):
PED = −20% ÷ 20% = −1.0 (Unit Elastic)
Interpreting Your Result
- |PED| > 1 — Elastic: Consumers are price-sensitive. Raise price → revenue falls. Lower price → revenue rises.
- |PED| = 1 — Unit Elastic: Revenue stays the same when price changes.
- |PED| < 1 — Inelastic: Consumers are not price-sensitive. Raising price increases total revenue.
- |PED| = 0 — Perfectly Inelastic: Quantity never changes regardless of price (e.g., life-saving medication).
- |PED| = ∞ — Perfectly Elastic: Any price increase causes demand to drop to zero.
💡 Business tip: If your product is inelastic (PED < 1), you can raise prices and earn more revenue. If elastic (PED > 1), compete on price to capture more volume. Most consumer staples are inelastic; luxury goods are elastic.
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Frequently Asked Questions
What is price elasticity of demand?
Price elasticity of demand (PED) measures how much quantity demanded changes in response to a price change. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A PED above 1 means demand is elastic; below 1 means inelastic.
What does elastic vs inelastic demand mean?
Elastic demand (PED > 1) means consumers are very responsive to price changes — a small price increase causes a large drop in quantity. Inelastic demand (PED < 1) means consumers buy roughly the same amount regardless of price. Necessities like medicine tend to be inelastic; luxury goods tend to be elastic.
What is the elasticity of demand formula?
PED = ((Q2−Q1)/Q1) ÷ ((P2−P1)/P1). For large price changes, the midpoint method is more accurate: PED = ((Q2−Q1)/((Q1+Q2)/2)) ÷ ((P2−P1)/((P1+P2)/2)). The result is typically negative because price and quantity move in opposite directions.
What is cross-price elasticity of demand?
Cross-price elasticity measures how the quantity demanded of one good changes when the price of a different good changes. Positive cross-price elasticity indicates substitutes (butter and margarine). Negative cross-price elasticity indicates complements (cars and gasoline).
How do businesses use price elasticity?
Businesses use PED to optimize pricing. For inelastic goods, raising prices increases total revenue. For elastic goods, lowering prices can capture more volume and increase revenue. Airlines, hotels, and subscription services use elasticity analysis to decide when to offer discounts or apply premium pricing.