Price Elasticity of Demand
How responsive quantity demanded is to a change in price.
Formula
Variables
Example
Qty −20% when price +10%: E_d = −2 (elastic)
How it works
Price elasticity of demand measures how strongly buyers change the quantity they purchase when price changes. It is found by comparing the percentage change in quantity demanded with the percentage change in price, so the result is a unitless ratio that lets you compare responsiveness across different products. A larger absolute value means consumers are more sensitive to price changes, while a smaller absolute value means demand is more resistant to price changes.
When to use it
Use this formula when analyzing how a product's sales might react to a price increase or discount, especially in pricing, marketing, and tax-policy questions. It is also useful for comparing whether demand for one good is more or less responsive than demand for another.
Worked example, step by step
A company raises the price of a game from $50 to $55, and monthly sales fall from 2,000 units to 1,800 units. Step 1: Find % change in quantity demanded = (1,800 - 2,000) / 2,000 × 100 = -10% Step 2: Find % change in price = (55 - 50) / 50 × 100 = +10% Step 3: Substitute into the formula: E_d = %ΔQ_d / %ΔP = -10% / 10% = -1 Final answer: E_d = -1, so demand is unit elastic over this price change.
Common mistakes to avoid
- Using the new value as the denominator instead of the original value when finding percentage changes
- Ignoring the negative sign and forgetting that demand usually moves opposite to price
- Mixing up quantity demanded with quantity supplied
Did You Know?
Necessities like insulin are inelastic; luxuries and easily substituted goods are highly elastic.
Share this formula
More in Economics
View allGDP (Expenditure Approach)
BasicNational output measured as total spending by households, firms, government and net exports.
GDP Growth Rate
BasicThe percentage change in real output between two periods.
Inflation Rate
BasicThe rate at which the general price level rises over time.
Unemployment Rate
BasicThe share of the labor force that is jobless and actively seeking work.
Real GDP
IntermediateOutput adjusted for inflation, so growth reflects real production, not rising prices.
GDP Deflator
IntermediateA broad price index covering all goods in GDP, not just a consumer basket.