The price elasticity of demand (often written PED or Ed) quantifies how much the quantity demanded of a good or service changes in response to a change in its price, holding other factors constant. Because most goods follow the law of demand, quantity demanded moves in the opposite direction to price, so the raw elasticity value is usually negative; economists commonly report the absolute value and discuss demand as "elastic" or "inelastic." For a plain percentage comparison the formula is: percentage change in quantity demanded divided by percentage change in price.

Definition and basic formula

At its simplest, price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price). For example, if price rises 10% and quantity demanded falls 20%, PED = −2 (often stated as 2, elastic). There are two standard approaches to calculating elasticity: the arc or midpoint method, which uses average values to avoid asymmetry when moving from one price to another; and the point elasticity, which uses calculus (derivative) for infinitesimal changes and is useful with continuous demand functions.

Types and how to interpret them

  • Elastic demand (|Ed| > 1): quantity changes proportionally more than price. Revenue falls when price rises.
  • Inelastic demand (|Ed| < 1): quantity changes proportionally less than price. Revenue rises when price rises.
  • Unitary elasticity (|Ed| = 1): proportional changes are equal; total revenue remains unchanged for small changes.
  • Perfectly elastic: a horizontal demand curve; consumers will only buy at one price.
  • Perfectly inelastic: a vertical demand curve; quantity demanded does not respond to price.

Determinants of price elasticity

Several practical factors influence whether demand for a product is elastic or inelastic:

  • Availability of close substitutes: more substitutes → more elastic demand.
  • Share of consumer budget: goods that take a large share of income tend to be more elastic.
  • Necessity vs luxury: necessities are generally more inelastic than luxuries.
  • Time horizon: demand often becomes more elastic over longer periods as consumers adjust behavior and find alternatives.
  • Durability and habit: durable goods or addictive goods can show inelastic short-term demand.

Measurement, graphical notes and examples

On a graph the elasticity at a point is related to the shape of the demand curve but is not the same as the slope. Slope measures absolute change in quantity per unit change in price; elasticity uses percentage changes, so two demand curves with different units can have identical elasticity patterns. A steeper curve typically signals lower elasticity, while a flatter curve signals higher elasticity, but precise calculation requires the percentage-change method. Practical measurement often uses the midpoint formula: (ΔQ / average Q) ÷ (ΔP / average P). Example: price falls from $10 to $8 (−20%) and quantity rises from 100 to 140 (+40%); midpoint elasticity ≈ 0.40 ÷ 0.20 = 2 (elastic).

Applications and policy relevance

Understanding PED is central to business pricing, tax policy and welfare analysis. Firms use elasticity to set prices to maximize revenue or profit, to anticipate customer responses to discounts, and to forecast the effect of advertising. Governments rely on elasticity estimates to predict how a tax on a good will affect consumption and tax revenue: taxes on inelastic goods tend to raise revenue with smaller drops in quantity. Elasticity also matters for evaluating consumer surplus, deadweight loss and the incidence of price changes between buyers and sellers.

Elasticity estimates depend on the data period, the market definition and available substitutes; they can vary across income groups and regions. Measurement can be sensitive to the choice between arc and point formulas. Related elasticities—cross-price elasticity and income elasticity—measure responses to other prices or income changes and help complete demand analysis. For further conceptual background see general economics resources and technical discussions of the slope versus elasticity distinction.