What is price elasticity of demand?
PED measures how sensitive quantity demanded is to a change in price — a larger magnitude means demand responds more sharply to price changes. It's typically negative for ordinary goods (price up, quantity down), so the sign is usually just noting that normal downward-sloping relationship; the classification that matters is based on the size of the number, ignoring the sign.
Midpoint vs. simple elasticity — and why it matters
The simple percentage-change formula has a real problem: it gives a different answer depending on which price you call "old" and which you call "new." Going from $10 to $12 with quantity falling from 100 to 80 gives a PED of exactly −1.0. Going the other direction — the same two points, from $12 back to $10 — gives −1.5. Same two points on the same demand curve, two different numbers, and in this example the discrepancy is even large enough to flip the classification from "unit elastic" to "elastic" depending on which direction you happened to calculate from.
The midpoint (arc) formula fixes this by using the average of the two prices and two quantities as the base for each percentage change, instead of either endpoint. It gives −1.222 either direction — the same answer regardless of which point you start from — which is why it's the standard, recommended approach in most introductory economics courses. This calculator defaults to midpoint for that reason, but includes the simple method too, since some courses and textbooks specifically ask for it.
PED = [(Q2−Q1) ÷ ((Q1+Q2)/2)] ÷ [(P2−P1) ÷ ((P1+P2)/2)] PED = [(Q2−Q1) ÷ Q1] ÷ [(P2−P1) ÷ P1] How to read the result
| |PED| | Classification | Meaning |
|---|---|---|
| 0 | Perfectly Inelastic | Quantity doesn't change at all, regardless of price |
| 0 – 1 | Inelastic | Quantity changes proportionally less than price |
| 1 | Unit Elastic | Quantity changes by the same percentage as price |
| > 1 | Elastic | Quantity changes proportionally more than price |
Elasticity and revenue
Whether a price change raises or lowers total revenue depends entirely on elasticity. If demand is elastic, raising price decreases revenue, because the drop in quantity outweighs the higher price per unit. If demand is inelastic, raising price increases revenue, because quantity barely responds. Once you have your elasticity figure, the Revenue Calculator can confirm the actual dollar impact for your specific numbers.
Frequently asked questions
What is a good price elasticity of demand?
There's no universally "good" number — it depends on the good and your goals. Necessities tend to have inelastic demand (people keep buying regardless of price), while luxuries and goods with close substitutes tend to be elastic. Whether elastic or inelastic is "good" for you depends on whether you're trying to raise or lower price.
Why does the midpoint formula give a different answer than the simple formula?
The simple formula measures percentage change relative to the starting point, so it gives a different number depending on which of the two points you treat as the start. The midpoint formula measures relative to the average of both points instead, which removes that direction-dependence and gives a consistent answer either way.
Why is price elasticity usually a negative number?
For most goods, price and quantity demanded move in opposite directions — when price goes up, quantity demanded goes down, and vice versa. That opposite relationship is what produces the negative sign. Classification into elastic, inelastic, or unit elastic is based on the size of the number, not its sign.