What is price elasticity of demand?

Price elasticity of demand (PED) measures how much the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, and is normally negative.

What is the difference between elastic and inelastic demand?

Demand is elastic when |PED| > 1: quantity responds more than proportionately to a price change (a flat demand curve). Demand is inelastic when |PED| < 1: quantity responds less than proportionately (a steep demand curve). |PED| = 1 is unit elastic.

How does elasticity affect total revenue?

If demand is inelastic, raising the price increases total revenue, because quantity falls only a little. If demand is elastic, raising the price reduces total revenue, because quantity falls sharply. Revenue is maximised where demand is unit elastic.

What determines whether demand is elastic or inelastic?

Key factors are the availability of close substitutes (more substitutes → more elastic), whether the good is a necessity or luxury, the proportion of income it takes up, and the time period — demand tends to become more elastic over time as buyers adjust.

Price Elasticity of Demand Explained (Interactive) — PED & Revenue

Q: How does elasticity affect total revenue?

If demand is inelastic, raising the price increases total revenue, because quantity falls only a little. If demand is elastic, raising the price reduces total revenue, because quantity falls sharply. Revenue is maximised where demand is unit elastic.

Q: What determines whether demand is elastic or inelastic?

Key factors are the availability of close substitutes (more substitutes → more elastic), whether the good is a necessity or luxury, the proportion of income it takes up, and the time period — demand tends to become more elastic over time as buyers adjust.

A price change always cuts sales — but by how much? Price elasticity of demand (PED) puts a number on that sensitivity, and it decides whether a firm raising its price ends up richer or poorer. Flex the demand curve below and watch the answer flip.

How sensitive is demand?

Some goods barely respond to price — insulin, petrol, a train ticket to work. Others are hugely sensitive — one brand of crisps among twenty. A steep demand curve means quantity hardly moves when price changes (inelastic); a flat one means quantity swings a lot (elastic).

Elasticity is just the steepness of demand translated into percentages: how many percent does quantity move for each percent that price moves?

Steepen and flatten it

Drag the point along the demand curve and use the slope slider to flex it. The upper half of a straight-line demand curve is always elastic, the lower half inelastic, with a unit-elastic midpoint — and the shaded rectangle is total revenue, $P\times Q$ . Watch what happens to that rectangle as you move up and down the curve.

InteractiveElasticity, PED and total revenue

Loading interactive…

Flex the curve and drag the point. The shaded rectangle is revenue P×Q; the curve is split into its elastic (top) and inelastic (bottom) halves.

Text description ↓

An interactive demand curve with price on the vertical axis and quantity on the horizontal axis. A slider changes the slope of the curve (steeper = more inelastic, flatter = more elastic). A draggable point on the curve sets a price and quantity, and a shaded rectangle shows total revenue (price × quantity). The top half of the straight-line demand curve is labelled elastic (|PED| > 1) and the bottom half inelastic (|PED| < 1), meeting at a unit-elastic midpoint. Readouts show the current price, quantity, PED value and total revenue.

The PED formula

PED is the percentage change in quantity demanded divided by the percentage change in price:

\text{PED} = \frac{\%\,\Delta Q_d}{\%\,\Delta P}

Because demand slopes down, a price rise causes a quantity fall, so PED is normally negative. We usually talk about its size, $|\text{PED}|$ :

Elasticity and total revenue

This is why elasticity matters commercially. Total revenue is $P\times Q$ , and a price change pushes those two in opposite directions. Which effect wins depends on elasticity:

If demand is inelastic, raising price raises revenue — quantity barely falls, so the higher price wins.
If demand is elastic, raising price lowers revenue — quantity collapses, outweighing the higher price.
Revenue is maximised where demand is unit elastic, at the midpoint of a straight-line demand curve.

Worked example

1Worked example — calculating PED

A café raises the price of a coffee from $\pounds 2.00$ to $\pounds 2.20$ and daily sales fall from 200 to 180.

Percentage change in price: $\tfrac{0.20}{2.00} = +10\%$ . Percentage change in quantity: $\tfrac{-20}{200} = -10\%$ . So

\text{PED} = \frac{-10\%}{+10\%} = -1 \quad(\text{unit elastic}).

Revenue is unchanged: $200\times 2.00 = \pounds 400$ versus $180\times 2.20 = \pounds 396$ — essentially flat, exactly what unit elasticity predicts.

What makes demand elastic

Four determinants examiners look for:

Substitutes — the more (and closer) the substitutes, the more elastic.
Necessity vs luxury — necessities are inelastic; luxuries are elastic.
Proportion of income — goods that take a big share of income are more elastic.
Time — demand becomes more elastic over time as buyers find alternatives.

Common mistakes

Your turn

Demand for a good has |PED| = 0.4. A firm wants more revenue. Should it raise or cut its price?

Show the answer ↓

|PED| < 1, so demand is inelastic — the firm should raise price. Quantity falls by proportionately less than price rises, so total revenue increases.

How sensitive is demand?

Elasticity is just the steepness of demand translated into percentages: how many percent does quantity move for each percent that price moves?

Steepen and flatten it

InteractiveElasticity, PED and total revenue

Loading interactive…

Flex the curve and drag the point. The shaded rectangle is revenue P×Q; the curve is split into its elastic (top) and inelastic (bottom) halves.

Text description ↓

The PED formula

PED is the percentage change in quantity demanded divided by the percentage change in price:

\text{PED} = \frac{\%\,\Delta Q_d}{\%\,\Delta P}

Because demand slopes down, a price rise causes a quantity fall, so PED is normally negative. We usually talk about its size, $|\text{PED}|$ :

Elasticity and total revenue

This is why elasticity matters commercially. Total revenue is $P\times Q$ , and a price change pushes those two in opposite directions. Which effect wins depends on elasticity:

If demand is inelastic, raising price raises revenue — quantity barely falls, so the higher price wins.
If demand is elastic, raising price lowers revenue — quantity collapses, outweighing the higher price.
Revenue is maximised where demand is unit elastic, at the midpoint of a straight-line demand curve.

Worked example

1Worked example — calculating PED

A café raises the price of a coffee from $\pounds 2.00$ to $\pounds 2.20$ and daily sales fall from 200 to 180.

Percentage change in price: $\tfrac{0.20}{2.00} = +10\%$ . Percentage change in quantity: $\tfrac{-20}{200} = -10\%$ . So

\text{PED} = \frac{-10\%}{+10\%} = -1 \quad(\text{unit elastic}).

Revenue is unchanged: $200\times 2.00 = \pounds 400$ versus $180\times 2.20 = \pounds 396$ — essentially flat, exactly what unit elasticity predicts.

What makes demand elastic

Four determinants examiners look for:

Substitutes — the more (and closer) the substitutes, the more elastic.
Necessity vs luxury — necessities are inelastic; luxuries are elastic.
Proportion of income — goods that take a big share of income are more elastic.
Time — demand becomes more elastic over time as buyers find alternatives.

Common mistakes

Your turn

Demand for a good has |PED| = 0.4. A firm wants more revenue. Should it raise or cut its price?

Show the answer ↓

|PED| < 1, so demand is inelastic — the firm should raise price. Quantity falls by proportionately less than price rises, so total revenue increases.

Price Elasticity of Demand

How sensitive is demand?

Steepen and flatten it

The PED formula

Elasticity and total revenue

Worked example

What makes demand elastic

Common mistakes

Frequently asked questions

Keep exploring

Want a tutor to walk you through it?

Price Elasticity of Demand

How sensitive is demand?

Steepen and flatten it

The PED formula

Elasticity and total revenue

Worked example

What makes demand elastic

Common mistakes

Frequently asked questions

Keep exploring

Want a tutor to walk you through it?