How To Calculate Price Elasticity Example

Price Elasticity of Demand Formula:

\[ PED = \frac{\%\Delta Q}{\%\Delta P} = \frac{\frac{Q_2 - Q_1}{Q_1}}{\frac{P_2 - P_1}{P_1}} \]

Initial Quantity (Q₁):

units

Final Quantity (Q₂):

units

Initial Price (P₁):

Final Price (P₂):

Price Elasticity of Demand (PED):

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1. What Is Price Elasticity of Demand?

Price Elasticity of Demand (PED) measures how responsive 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.

2. How Does The Calculator Work?

The calculator uses the standard PED formula:

\[ PED = \frac{\%\Delta Q}{\%\Delta P} = \frac{\frac{Q_2 - Q_1}{Q_1}}{\frac{P_2 - P_1}{P_1}} \]

Where:

$ PED $ — Price Elasticity of Demand
$ Q_1 $ — Initial quantity demanded
$ Q_2 $ — Final quantity demanded
$ P_1 $ — Initial price
$ P_2 $ — Final price
$ \%\Delta Q $ — Percentage change in quantity
$ \%\Delta P $ — Percentage change in price

Example: If quantity decreases from 100 to 80 units (20% decrease) when price increases from $10 to $12 (20% increase), PED = -1.0

3. Interpreting PED Values

Elastic (|PED| > 1): Quantity demanded is highly responsive to price changes. Revenue decreases when price increases.
Inelastic (|PED| < 1): Quantity demanded is not very responsive to price changes. Revenue increases when price increases.
Unitary Elastic (|PED| = 1): Percentage change in quantity equals percentage change in price. Revenue remains constant.
Perfectly Inelastic (PED = 0): Quantity demanded does not change with price.
Perfectly Elastic (PED = ∞): Any price increase causes quantity demanded to drop to zero.

4. Using The Calculator

Instructions: Enter initial and final quantities and prices. All values must be positive numbers. The calculator will compute percentage changes and the final PED value.

5. Frequently Asked Questions (FAQ)

Q1: Why is PED usually negative?
A: Due to the law of demand, price and quantity typically move in opposite directions, resulting in a negative relationship.

Q2: What factors affect price elasticity?
A: Availability of substitutes, necessity vs luxury, time horizon, proportion of income spent, and brand loyalty.

Q3: How do businesses use PED?
A: For pricing strategies, revenue forecasting, tax incidence analysis, and understanding market competition.

Q4: What's the difference between elastic and inelastic demand?
A: Elastic demand means consumers are price-sensitive; inelastic means they are less responsive to price changes.

Q5: Can PED be positive?
A: Yes, for Giffen goods or Veblen goods where higher prices may actually increase demand due to perceived status or quality.