The price elasticity of demand is used by economists to measure how much the demand of a product is affected by changes in its price (Mankiw, 2024). When demand changes considerably in response to a price change, it is said to be elastic. Alternatively, when price changes have little effect on demand, the good is said to be inelastic.
The above image is an equation showing the formula for calculating price elasticity of demand: Price Elasticity of Demand = (% Change in Quantity Demanded) รท (% Change in Price). The formula measures how responsive quantity demanded is to a change in price.
- Price elasticity of demand > 1
- A small percentage change in price causes a larger percentage change in quantity demanded
- Examples include luxury items, non-necessities, and items with many substitutes
- Price elasticity of demand < 1
- A large percentage change in price causes a smaller percentage change in quantity demanded
- Examples include gasoline and medications
- Price elasticity of demand = 1
- The percentage change in price is exactly the same as the percentage change in quantity demanded
Price elasticity of demand has an impact on total revenue. When demand is elastic, decreasing prices increase total revenue. When demand is inelastic, increasing prices increase total revenue.
Mankiw, N. G. (2024). Principles of economics. Cengage Learning.
Need More Help?
Want additional support? Sign up for our group sessions. Take a look at the full workshop schedule. For help signing up and accessing the Academic Support Center, see the How to Book ASC Sessions Page.