# Measuring the Price Elasticity of Demand

## The price elasticity of demand (PED) is calculated by diving the percentage change in quantity demanded by the percentage change in price.

#### Key Points

• PED captures the change in quantity demanded in response to a change in the good's own price (as opposed to the price of some other good).

• The formula for price elasticity yields a value that is negative, pure, and ranges from zero to negative infinity.

• The result provided by the formula will be accurate only if the changes in price and quantity demanded are small.

#### Terms

• Responsiveness of quantity demanded to a change in the good's own price

• Measures the responsiveness of the demand for a good to a change in the price of another good.

#### Figures

1. ##### Sale

There is an inverse relationship between price and quantity demanded, so the elasticity coefficient is almost always negative.

2. ##### Price Elasticity of Demand and Revenue

PED is based off of percent changes, so the starting nominal values of price and quantity are significant.

The price elasticity of demand (PED) captures how price-sensitive consumers are for a given product or service by measuring the responsiveness of quantity demanded to changes in the good's own price. This is in contrast to measuring the responsiveness of the good's demand to a change in price for some other good (a complement or substitute), which is called the cross-price elasticity of demand. The own-price elasticity of demand is often simply called the price elasticity.

The following formula is used to calculate the own-price elasticity of demand:

$Elasticity\quad =\quad \frac { \%\quad Change\quad in\quad Quantity\quad Demanded\quad }{ \%\quad Change\quad in\quad Price }$

The formula above usually yields a negative value because of the inverse relationship between price and quantity demanded Figure 1. However, economists often disregard the negative sign and report the elasticity as an absolute value. For example, if the price of a good increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity at the initial price and quantity is -5%/5% = -1. This number is likely to be reported simply as 1.

There are a few other important points to note about the coefficient value provided by this formula. First, the elasticity coefficient is a pure number, meaning that it does not have units of measurement associated with it. Second, the coefficient value can range from zero to negative infinity. Finally, the result provided by the formula will be accurate only when the changes in price and quantity are small. The result will be less accurate when the changes are large.

Since PED is based off of percent changes, the starting nominal quantity and price matter. At low prices and high quantities, the PED is therefore more inelastic. For example, a drop in the price of $1 from a starting price of$100 is a 1% drop, but if the starting price is \$10, it is a 10% drop. Similarly, at high prices and low quantities, PED is more elastic (Figure 2).

#### Key Term Glossary

Complement
A good with a negative cross elasticity of demand, meaning the good's demand is increased when the price of another good is decreased.
##### Appears in these related concepts:
consumer
An individual who trades money for goods.
##### Appears in these related concepts:
demand
The desire to purchase goods and services.
##### Appears in these related concepts:
elastic
Sensitive to changes in price.
##### Appears in these related concepts:
Elastic
Demand for a good is elastic when a change in price has a relatively large effect on the quantity of the good demanded.
##### Appears in these related concepts:
elasticities
Elasticity is the ratio of the percentage change in one variable to the percentage change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a unitless way.
##### Appears in these related concepts:
elasticity
The sensitivity of changes in a quantity with respect to changes in another quantity.
##### Appears in these related concepts:
goods
That which is produced, then traded, bought, or sold, and finally consumed.
##### Appears in these related concepts:
inelastic
Not sensitive to changes in price.
##### Appears in these related concepts:
Inelastic
Demand for a good is inelastic when a change in price has a relatively small effect on the quantity of the good demanded.
##### Appears in these related concepts:
nominal
Without adjustment to remove the effects of inflation (in contrast to real).
##### Appears in these related concepts:
price
The cost required to gain possession of something.
##### Appears in these related concepts:
Price
The quantity of payment or compensation given by one party to another in return for goods or services.
##### Appears in these related concepts:
price elasticity
A measure of how a product's demand and supply will change if you adjust its price.
##### Appears in these related concepts:
Substitute
A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another is increased.
##### Appears in these related concepts:
value
The amount (of money or goods or services) that is considered to be a fair equivalent for something else.