Price Elasticity of Demand

What is this formula?

Price Elasticity of Demand measures how sensitive the quantity demanded of a good is to changes in its price.

It quantifies the percentage change in quantity demanded resulting from a one percent change in price.

When to use it

Use this formula when analyzing consumer behavior, pricing strategies, taxation effects, and market responsiveness.

Example

Initial price:

P1 = 10 USD

Final price:

P2 = 11 USD

Initial quantity demanded:

Q1 = 1000 units

Final quantity demanded:

Q2 = 900 units

Formula:

Ed = ((Q2−Q1)/Q1)/((P2−P1)/P1)

Substitution:

Ed = ((900−1000)/1000)/((11−10)/10)

Ed = -0.1/0.1

Ed = -1.0

Result:

Demand has unit elasticity. A 1% increase in price produces approximately a 1% decrease in quantity demanded.

Applications

- Pricing decisions

- Revenue optimization

- Tax policy analysis

- Market research

- Demand forecasting

Note

This formula uses percentage changes relative to the initial values. Alternative methods such as arc elasticity use average values and often provide more symmetric results when price changes are large.