Definition – What is price elasticity of demand?
Price elasticity of demand shows how responsive the quantity demanded of an item will change when the price changes.
A higher price elasticity of demand means that when prices go up, the number of units sold falls quickly. When prices go down, the number of units sold goes up quickly.
A lower price elasticity of demand means that when prices go up, the number of units sold falls, but not very quickly. When prices go down, more units are sold but that number does not rise quickly.
A unitary price elasticity of demand (PEoD = 1) means that price and demand are matched. If price goes up by 10%, the quantity sold goes down by 10%. If price goes down by 20%, the number of units sold goes up by 20%.
A negative PEoD means that if price increases, quantity demanded also increases. If price decreases, quantity demanded also decreases.
Formula – How to calculate price elasticity of demand
Price Elasticity of Demand = % Change in Demand / % Change in Price
% Change in Demand = (Demand (end) – Demand (start)) / Demand (start)
% Change in Price = (Price (end) – Price (start)) / Price (start)
Demand increases from 1,000 units to 2,000 units. In the same period, price increases from $20 to $30 per unit.
% Change in Demand = (2,000 – 1,000) / 1,000 = 1,000 / 1,000 = 1
% Change in Price = ($30 – $20) / $20 = $10 / $20 = 0.50
Price Elasticity of Demand = 1 / 0.50 = 2.00
Therefore, Price Elasticity of Demand is 2.00.
Sources and more resources
- Wikipedia – Price elasticity of demand – An explanation of price elasticity of demand including formulas.
- Khan Academy – Price elasticity of demand – Part of a larger course on microeconomics. This video is an introduction to price elasticity of demand.
- Investopedia – Price elasticity of demand – A short and simple explanation of the concept.