How to Calculate Price Elasticity of Demand (With Example)
The elastic demand formula is a fundamental concept in economics that measures how sensitive the quantity demanded of a product is to changes in its price. Understanding this concept is essential for school boards, competitive exams, and practical business decision-making. It helps predict consumer behavior and pricing strategy.
| Elasticity Type | Elasticity Coefficient (|PED|) | Nature of Demand | Example |
|---|---|---|---|
| Elastic | Greater than 1 | Highly responsive to price | Luxury goods, electronics |
| Inelastic | Less than 1 | Less responsive to price | Essential medicines, salt |
| Unitary Elastic | Exactly 1 | Proportional response | Midpoint case (rare in reality) |
Elastic Demand Formula
The elastic demand formula, also known as the price elasticity of demand formula, calculates how much the quantity demanded changes in response to a price change. The formula uses percentage changes to allow for simple comparison between different goods or markets.
Elasticity (PED) = (% Change in Quantity Demanded) ÷ (% Change in Price)
Where:
- % Change in Quantity Demanded = [(New Quantity – Original Quantity) ÷ Original Quantity] × 100
- % Change in Price = [(New Price – Original Price) ÷ Original Price] × 100
The value is usually negative due to the law of demand, but we use the absolute value for classification.
Step-by-Step: How to Calculate Elastic Demand
Follow these steps to apply the elastic demand formula accurately in exams and practical situations:
- Find original and new price and quantity figures.
- Calculate the percentage change in quantity demanded.
- Calculate the percentage change in price.
- Divide the quantity change by the price change (use absolute values).
- Classify: Elastic (>1), Inelastic (<1), Unitary (=1).
Worked Example: Elastic Demand Calculation
Suppose the price of headphones drops from ₹1,000 to ₹800, and the quantity demanded rises from 200 units to 260 units. Calculate the price elasticity of demand.
- Change in quantity: (260 - 200) = 60 units; % change = (60/200) × 100 = 30%
- Change in price: (800 - 1000) = –200; % change = (–200/1000) × 100 = –20%
- PED = |30% ÷ –20%| = 1.5
Since 1.5 > 1, the demand is elastic.
Classification of Elasticity Values
Values from the elastic demand formula indicate if demand is elastic, inelastic, or unitary. Here’s a quick guide:
- Elastic Demand: PED > 1
- Inelastic Demand: PED < 1
- Unitary Elastic Demand: PED = 1
This classification helps in pricing strategies and policy decisions. For complete understanding, review Elasticity of Demand on Vedantu.
Common Mistakes and Exam Tips
- Always use percentage changes, not actual changes.
- Take absolute value to avoid negative confusion.
- Label your final answer as “elastic”, “inelastic”, or “unitary”.
- Double-check for rounding errors in percentages.
- For arc elasticity, use the average of old and new values as base.
- Use formula boxes and tables for quick revision right before the exam.
Real-Life Examples and Applications
Elastic demand commonly occurs with luxury goods, brands facing competition, and non-essential purchases.
- Mobile Phones: Many substitutes, so demand is elastic. A small price drop increases sales significantly.
- Soft Drinks: Pepsi and Coke compete, leading to high price sensitivity.
- Public Transport: In cities with taxi and bus choices, a fare increase quickly shifts passengers.
- Exam Scenario: In CBSE/ISC numericals, elastic demand is often illustrated using consumer gadgets or branded apparel.
To deepen your examples, refer to Price Elasticity of Demand and Cross Elasticity of Demand on Vedantu.
Practice Questions: Elastic Demand Formula
- Q1: Price falls from ₹50 to ₹40. Demand rises from 120 to 180 units. Find PED.
- % Change in Quantity: (180-120)/120 × 100 = 50%
- % Change in Price: (40-50)/50 × 100 = –20%
- PED = |50% ÷ –20%| = 2.5 (Elastic) - Q2: Price rises from ₹200 to ₹210. Demand drops from 500 to 480 units. Find PED.
- % Change in Quantity: (480–500)/500 × 100 = –4%
- % Change in Price: (210–200)/200 × 100 = 5%
- PED = |–4% ÷ 5%| = 0.8 (Inelastic) - Q3: Why does elasticity use percentage change?
- Answer: It standardizes measurement between different goods and units, making economic analysis fair.
For more solved numericals, visit Sandeep Garg Microeconomics Class 12 Solutions Chapter 6.
The elastic demand formula is a practical tool for measuring consumer responsiveness to price changes. Knowing how to apply and interpret this concept helps in exams, business pricing decisions, and real-life scenarios. At Vedantu, economics topics like elasticity are simplified for your revision and understanding.
FAQs on Elastic Demand Formula Explained for Students
1. What is the price elasticity of demand formula?
The price elasticity of demand (PED) formula is a measure used in economics to show the responsiveness of the quantity demanded of a good or service to a change in its price. The formula is calculated as:
PED = (% Change in Quantity Demanded) / (% Change in Price)
This formula helps determine how sensitive consumer demand is to price fluctuations.
2. How do you calculate the price elasticity of demand with a practical example?
To calculate price elasticity, follow these steps:
- Step 1: Calculate the percentage change in quantity demanded: [(New Quantity - Old Quantity) / Old Quantity] x 100.
- Step 2: Calculate the percentage change in price: [(New Price - Old Price) / Old Price] x 100.
- Step 3: Divide the result from Step 1 by the result from Step 2.
For example, if a headphone's price drops from ₹1,000 to ₹800 (a -20% change) and demand rises from 200 to 260 units (a +30% change), the PED is: 30% / -20% = -1.5.
3. How do you interpret the value from the elastic demand formula?
The numerical value of the Price Elasticity of Demand (PED), ignoring the negative sign, tells you the nature of the demand:
- If |PED| > 1, demand is elastic. A price change leads to a proportionally larger change in quantity demanded.
- If |PED| < 1, demand is inelastic. A price change leads to a proportionally smaller change in quantity demanded.
- If |PED| = 1, demand is unitary elastic. The percentage change in quantity demanded is exactly equal to the percentage change in price.
4. Why is the price elasticity of demand (PED) value typically negative, and why do economists use its absolute value?
The PED value is usually negative because of the law of demand, which states that price and quantity demanded have an inverse relationship: as price increases, quantity demanded decreases, and vice versa. Economists use the absolute value (ignoring the negative sign) to focus on the magnitude of the elasticity. This makes it easier to compare whether demand is elastic, inelastic, or unitary without confusion caused by the negative sign.
5. What are the different types of price elasticity of demand with examples?
There are five main types of price elasticity:
- Elastic Demand (|PED| > 1): High sensitivity to price. Examples include luxury goods like sports cars or specific brands of soft drinks with many alternatives.
- Inelastic Demand (|PED| < 1): Low sensitivity to price. Examples include necessities like salt, gasoline, or life-saving medicines.
- Unitary Elastic Demand (|PED| = 1): Proportional sensitivity. This is a theoretical point where total revenue is maximised.
- Perfectly Elastic Demand (|PED| = ∞): Infinite sensitivity. Consumers will only buy at one price. This applies to identical products in a perfectly competitive market.
- Perfectly Inelastic Demand (|PED| = 0): Zero sensitivity. Consumers will buy the same amount regardless of price, such as a life-saving drug with no substitutes.
6. Why is it important for a business to understand the elastic demand formula before setting prices?
Understanding the elastic demand formula is crucial for a business's pricing strategy and its impact on total revenue. If demand for a product is elastic, lowering the price will lead to a significant increase in quantity sold, thus increasing total revenue. Conversely, if demand is inelastic, a business can increase its prices without a major drop in sales, also leading to higher total revenue. This knowledge prevents poor pricing decisions that could harm profitability.
7. What is the main difference between price elasticity, income elasticity, and cross elasticity of demand?
These three concepts measure demand responsiveness to different factors:
- Price Elasticity of Demand measures how the quantity demanded of a good responds to a change in its own price.
- Income Elasticity of Demand measures how the quantity demanded of a good responds to a change in consumer income.
- Cross Elasticity of Demand measures how the quantity demanded of one good responds to a change in the price of another related good, which helps identify if goods are substitutes or complements.
8. What key factors determine if the demand for a product is elastic or inelastic?
Several factors determine a product's price elasticity of demand:
- Availability of Substitutes: The more substitutes available, the more elastic the demand.
- Nature of the Good: Necessities (like food) tend to have inelastic demand, while luxuries (like vacation packages) have elastic demand.
- Proportion of Income Spent: Goods that take up a large portion of a consumer's income (like rent) tend to have more elastic demand.
- Time Horizon: Demand is often more elastic over a longer period as consumers have more time to find substitutes.
9. Why does the availability of close substitutes have the biggest impact on a good's price elasticity of demand?
The availability of close substitutes is the most critical determinant because it directly impacts a consumer's ability to switch. When a product has many similar alternatives (e.g., different brands of coffee), a small price increase for one brand will cause consumers to easily switch to another, making its demand highly elastic. In contrast, a product with no close substitutes (e.g., a patented medicine) forces consumers to accept price changes, resulting in inelastic demand.
10. What is the difference between point elasticity and arc elasticity when using the demand formula?
Point elasticity measures the responsiveness of demand at a single, specific point on the demand curve and is best used for infinitesimally small changes in price. Arc elasticity, on the other hand, measures the average elasticity over a range or segment of the demand curve (between two points). Arc elasticity is generally considered more accurate for practical calculations involving larger price changes as it uses the midpoint formula for the base value.
