Price Elasticity of Demand: Formula, Types, Examples and Importance

Key Highlights 

• Price elasticity of demand measures how much quantity demanded changes when the price of a product changes. 
• Elasticity can be elastic, inelastic, unitary, perfectly elastic, or perfectly inelastic, depending on how strongly demand responds to price changes. 
• Factors such as substitutes, product necessity, income, time, number of uses, and brand loyalty can influence elasticity and affect pricing and revenue. 
• In this blog, you will learn the price elasticity of demand formula, how to calculate it, its types and degrees, graphs, examples, factors affecting elasticity, total revenue, importance, and its limitations. 

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What Is Price Elasticity of Demand? 

Price elasticity of demand is a measure of how much the quantity demanded of a product changes when its price changes. It shows how sensitive consumers are to changes in price. 

Suppose the price of a movie ticket rises by 10%. If the number of tickets purchased falls by 20%, consumers have responded strongly to the price increase. Demand is relatively elastic. 

Now consider electricity. If its price increases by 10% and households reduce their consumption by only 2%, demand is relatively inelastic. 

So, the concept is not simply about whether demand increases or decreases. It is about how much demand changes compared with the change in price. 

Why Does Price Affect Quantity Demanded? 

Price affects purchasing decisions because consumers have limited income and choices. 

When a product becomes more expensive, some customers may: 

• Buy less of it 
• Switch to another product 
• Delay their purchase 
• Choose a cheaper alternative 
• Stop buying it altogether 

The strength of this response depends on the product and the market. 

For example, a rise in the price of branded coffee may push some customers toward another brand. A rise in the price of an essential medicine may have a much smaller effect on consumption. 

Also read: Law of Demand: Meaning, Examples, Assumptions & Uses 

Price Elasticity of Demand Formula 

The basic price elasticity of demand formula compares the percentage change in quantity demanded with the percentage change in price. 

Price Elasticity of Demand = (% change in quantity demanded) ÷ (% change in price) 

For example, suppose the price of a product increases by 20%, while quantity demanded falls by 30%. 

PED = -30% / 20% = -1.5 

The negative sign shows the inverse relationship between price and quantity demanded. 

For classification, economists usually use the absolute value: 

|PED| = 1.5 

Since 1.5 is greater than 1, demand is elastic. 

Price Elasticity of Demand Equation 

The price elasticity of demand equation can also be written as: 

E_d = (%ΔQ_d) / (%ΔP) 

Where: 

• (E_d) = price elasticity of demand 
• (\Delta Q_d) = change in quantity demanded 
• (Q_d) = original quantity demanded 
• (\Delta P) = change in price 
• (P) = original price 

The equation helps economists compare the size of two percentage changes. 

Also read: How To Do Market Research - [Ultimate Guide] 

How to Calculate Price Elasticity of Demand 

There is more than one way to calculate elasticity. The method depends on the information you have and what you want to measure. 

The three common methods are: 

1. Percentage method 
2. Point elasticity method 
3. Arc or midpoint elasticity method 

Let us understand each one. 

1. Percentage Method 

The percentage method is the easiest place to start. It uses the basic formula: 

PED = % Change in Quantity Demanded / % Change in Price 

Let us take an example. 

Suppose the price of a notebook increases from ₹100 to ₹110. At ₹100, consumers buy 500 notebooks. After the price increases to ₹110, they buy 450 notebooks. First, calculate the percentage change in price. 

The price increases by: 

₹110 - ₹100 = ₹10 

Percentage change in price: 

(₹10 / ₹100) × 100 = 10% 

Now calculate the change in quantity demanded. 

Quantity falls from 500 to 450. 

So: 

450 - 500 = -50 

Percentage change in quantity demanded: 

(-50 / 500) × 100 = -10% 

Now apply the formula: 

PED = -10% / 10% = -1 

The absolute value is 1. 

Therefore, demand is unitary elastic. 

This example shows why percentage changes are important. The price changed by 10%, and quantity demanded also changed by 10%. The two changes are equal in size. 

2. Point Elasticity Method 

The point elasticity method measures elasticity at a specific point on a demand curve. 

It is useful when you want to know the elasticity for one particular price and quantity combination. 

The formula is: 

E_d = (dQ / dP) × (P / Q) 

Here, dQ/dP represents the change in quantity demanded caused by a small change in price. 

You may come across this method when studying a mathematical demand function. 

3. Arc or Midpoint Elasticity Method 

The arc method is useful when you are comparing two points on a demand curve. It is also called the midpoint elasticity method. 

Why do we need it? 

Suppose a product's price changes from ₹100 to ₹120. Quantity demanded changes from 500 units to 400 units. 

You could calculate the percentage change using the original values. But the result can be different if you reverse the direction of the calculation. 

The midpoint method solves this problem by using the average of the two prices and the average of the two quantities. 

The formula is: 

PED = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)] 

Here: 

• Q1 = Initial quantity 
• Q2 = New quantity 
• P1 = Initial price 
• P2 = New price 

Let us break it down. 

Suppose: 

• Initial price = ₹100 
• New price = ₹120 
• Initial quantity = 500 
• New quantity = 400 

First, find the average quantity: 

(500 + 400) / 2 = 450 

The change in quantity is: 

400 - 500 = -100 

So, the percentage change in quantity is: 

(-100 / 450) × 100 = -22.22% 

Now find the average price: 

(₹100 + ₹120) / 2 = ₹110 

The price change is: 

₹120 - ₹100 = ₹20 

Therefore: 

(₹20 / ₹110) × 100 = 18.18% 

Now calculate elasticity: 

PED = -22.22% / 18.18% = -1.22 

The absolute value is approximately 1.22. 

Since it is greater than 1, demand is elastic. 

The midpoint method is particularly useful when a question gives you two prices and two quantities and asks you to calculate elasticity between them. 

Worked Example of Price Elasticity of Demand 

Let us work through one complete example. 

A clothing store sells jackets for ₹2,000 each. 

At this price, it sells 1,000 jackets per month. 

The store reduces the price to ₹1,800. Monthly sales increase to 1,200 jackets. 

We want to calculate the elasticity of demand. 

Since we have two prices and two quantities, the midpoint method is suitable. 

Step 1: Find the change in quantity. 

1,200 - 1,000 = 200 

Average quantity: 

(1,000 + 1,200) / 2 = 1,100 

Percentage change in quantity: 

(200 / 1,100) × 100 = 18.18% 

Step 2: Find the change in price. 

₹1,800 - ₹2,000 = -₹200 

Average price: 

(₹2,000 + ₹1,800) / 2 = ₹1,900 

Percentage change in price: 

(-₹200 / ₹1,900) × 100 = -10.53% 

Step 3: Apply the elasticity formula. 

PED = 18.18% / -10.53% = -1.73 

Now ignore the negative sign for classification: 

|PED| = 1.73 

Since 1.73 is greater than 1, the demand is elastic. 

What does this result tell us? 

A 10.53% fall in price produced an 18.18% increase in quantity demanded. 

The response in quantity was therefore larger than the price change. 

That is the key idea behind elasticity. 

You do not need to memorise the example. Focus on the process: 

Find the percentage change in quantity → Find the percentage change in price → Divide the two → Interpret the result. 

Once this becomes familiar, questions involving the price elasticity of demand formula become much easier to solve. 

Also read: Difference Between Individual Demand and Market Demand Explained 

Types and Degrees of Price Elasticity of Demand 

Now that you know how to calculate elasticity, the next step is to understand what the result actually means. The value of elasticity tells us how strongly quantity demanded responds to a change in price.  The following are the five main types of price elasticity of demand: 

1. Perfectly Elastic Demand 

Perfectly elastic demand occurs when consumers are extremely sensitive to price. A very small increase in price can cause quantity demanded to fall sharply. 

The elasticity value is PED = ∞ 

The demand curve is horizontal. This is mainly a theoretical case. It helps explain the extreme level of price sensitivity. 

2. Elastic Demand 

Demand is elastic when quantity demanded changes by a greater percentage than price. 

The elasticity value is PED > 1 

For example, if price rises by 10% and quantity demanded falls by 30%: 

PED = -30% / 10% = -3 

|PED| = 3 

Therefore, demand is elastic. 

Products with many substitutes often have elastic demand. Customers can easily switch when the price becomes less attractive. 

3. Unitary Elastic Demand 

Demand is unitary elastic when the percentage change in quantity demanded is equal to the percentage change in price. 

The elasticity value is PED = 1 

For example, Price change = 20% 

Quantity demanded change = 20% 

Therefore: 

PED = -20% / 20% = -1 

|PED| = 1 

This means the two percentage changes are equal. 

4. Inelastic Demand 

Demand is inelastic when quantity demanded changes by a smaller percentage than price. 

The elasticity value is PED < 1 

For example, if price rises by 20% and quantity demanded falls by only 5%: 

PED = -5% / 20% = -0.25 

|PED| = 0.25 

Demand is therefore inelastic. 

Necessities often have relatively inelastic demand because consumers may continue buying them even after a price increase. 

5. Perfectly Inelastic Demand 

Perfectly inelastic demand occurs when quantity demanded does not change at all when price changes. 

The elasticity value is PED = 0 

The demand curve is vertical. This is mostly a theoretical situation. It represents the lowest possible level of price responsiveness. 

Quick Comparison of the Degrees of Elasticity 

Also read: Consumer Behavior in Marketing: Understanding the Psychology 

Price Elasticity of Demand Graph 

A price elasticity of demand graph shows how quantity demand responds to changes in price. Price is usually placed on the vertical axis, while quantity demanded is placed on the horizontal axis. 

The shape of the demand curve helps us visualise the degree of responsiveness. 

1. Elastic Demand Graph 

An elastic demand curve is relatively flatter. A small price change can cause a larger percentage change in quantity demanded. This often happens when consumers have several substitutes. 

For example, if one juice brand increases its price, customers can quickly switch to another brand. 

2. Inelastic Demand Graph 

An inelastic demand curve is relatively steeper. Quantity demanded changes by a smaller percentage than price. Essential products often show this behaviour. Consumers may continue buying them despite a price increase. 

However, inelastic demand does not mean demand stays completely unchanged. 

3. Unitary Elastic Demand Graph 

In unitary elastic demand, the percentage change in quantity demanded equals the percentage change in price. 

The value is PED = 1 

This type is important when studying total revenue because total revenue generally remains unchanged when price changes along a unitary elastic demand curve. 

4. Perfectly Elastic and Perfectly Inelastic Demand Graphs 

These are the two extreme cases. 

Perfectly elastic demand PED = ∞ 

The curve is horizontal. A small price increase can cause a very large fall in quantity demanded. 

Perfectly inelastic demand PED = 0 

The curve is vertical. Quantity demanded remains unchanged even when price changes. 

Also read: 16+ Types of Demand Forecasting Techniques and Methods 

What Determines Price Elasticity of Demand? 

The same price change can affect different products in very different ways. A 10% increase may have little effect on one product but cause a large fall in demand for another. 

Why does this happen? 

The answer lies in several factors that influence how easily consumers can change their buying behavior. 

• 1. Availability of Substitutes: Products with many substitutes usually have more elastic demand because customers can easily switch when prices rise. For example, if one juice brand increases its price, buyers can choose another brand.  
• 2. Necessity vs Luxury: Necessities usually have relatively inelastic demand because people continue buying them even when prices rise. Luxury products tend to be more elastic because consumers can delay or avoid these purchases.  
• 3. Proportion of Income: Products that take up a larger share of income tend to have more elastic demand. A small price increase in a low-cost item may not affect buying behaviour much, while an expensive product can be different.  
• 4. Time Period: Demand is often less elastic in the short run because consumers have limited alternatives. Over time, they can change habits, find substitutes, or adopt cheaper options.  
• 5. Number of Uses: Products with multiple uses can have more elastic demand. When prices rise, consumers can reduce non-essential uses. Electricity is a simple example.  
• 6. Brand Loyalty and Switching Costs: Strong brand loyalty can make demand less sensitive to price. Switching costs, such as money, time, training, or effort, can also discourage customers from moving to alternatives. 

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Price Elasticity of Demand Examples 

The concept becomes much easier when you apply it to everyday situations. The following price elasticity of demand examples show how different products can have different levels of responsiveness. 

1. Example of Elastic Demand 

Imagine a streaming platform increases its monthly subscription price from ₹500 to ₹550. 

The price increases by 10%. 

Many customers have other streaming platforms available. Some may cancel their subscription or switch to a competitor. 

Suppose subscriptions fall by 25%. 

Then: 

PED = -25% / 10% = -2.5 

|PED| = 2.5 

Since 2.5 is greater than 1, demand is elastic. The quantity demanded changed more than the price. This is possible because consumers have several alternatives. 

2. Example of Inelastic Demand 

Now consider an essential medicine. Suppose its price increases by 10%. Patients may still need almost the same quantity. 

If quantity demanded falls by only 2%: 

PED = -2% / 10% = -0.2 

|PED| = 0.2 

Since 0.2 is less than 1, demand is inelastic. 

The price changed significantly, but quantity demanded changed only slightly. This does not mean consumers are completely unaffected. It simply means their response is smaller compared with the price change. 

3. Example of Unitary Elastic Demand 

Suppose a product's price increases by 15%. At the same time, quantity demanded falls by 15%. 

Then: 

PED = -15% / 15% = -1 

|PED| = 1 

Therefore, demand is unitary elastic. The percentage change in quantity demanded is exactly equal to the percentage change in price. 

A Simple Way to Identify Elasticity 

When you get an elasticity question, do not immediately try to memorise the examples. 

Use the value. 

If: 

PED > 1 → Elastic demand 

PED = 1 → Unitary elastic demand 

PED < 1 → Inelastic demand 

For example: 

Price changes by 20%. 

Quantity demanded changes by 40%. 

PED = 40% / 20% = 2 

Demand is elastic. 

If quantity changes by only 5%: 

PED = 5% / 20% = 0.25 

Demand is inelastic. 

The calculation tells you the answer. The real-world factors explain why the result may be high or low. 

Also read: What is Hyperinflation? How does it Works? Causes, Effects 

Price Elasticity of Demand and Total Revenue 

Elasticity is closely connected to a business's total revenue. Total revenue is the money a business receives from selling its products. 

The formula is: 

TR = Price × Quantity Sold 

A change in price can affect both the price per unit and the number of units sold. The final effect on revenue depends on the elasticity of demand. This is why businesses need to understand elasticity before changing prices. 

1. Elastic Demand and Total Revenue 

When demand is elastic, quantity demanded changes by a larger percentage than price. 

In this situation, a price increase usually reduces total revenue. 

Why? 

Customers respond strongly to the higher price. The fall in quantity sold can be large enough to outweigh the higher price. 

If the business wants to increase revenue, lowering the price may work better because the increase in sales can be proportionally larger. The relationship can be summarized as: 

Price increases → Total revenue decreases 

Price decreases → Total revenue increases 

This generally applies when demand is elastic. 

2. Inelastic Demand and Total Revenue 

The relationship changes when demand is inelastic. Here, quantity demanded changes by a smaller percentage than price. Suppose a business increases its price by 20%, but quantity demanded falls by only 5%. 

PED = -5% / 20% = -0.25 

Demand is inelastic. 

The business may receive more total revenue because the higher price is not followed by a proportionally large fall in sales. The general relationship is: 

Price increases → Total revenue increases 

Price decreases → Total revenue decreases 

This is why businesses selling products with relatively inelastic demand may have more room to raise prices. However, this does not mean prices can be increased without limits. Consumer behavior can change, especially over time. 

3. Unitary Elasticity and Total Revenue 

With unitary elastic demand, the percentage change in quantity demanded equals the percentage change in price. 

The elasticity value is: 

PED = 1 

In this situation, total revenue generally remains unchanged when price changes along the relevant portion of the demand curve. 

For example: 

Initial price = ₹100 

Initial quantity = 100 units 

TR = ₹100 × 100 = ₹10,000 

Now suppose the price falls to ₹80 and quantity rises to 125 units. 

New revenue: 

TR = ₹80 × 125 = ₹10,000 

Revenue remains the same. 

Total Revenue and Elasticity: Quick Summary 

Demand	Price Change	Effect on Total Revenue
Elastic	Price increases	Revenue decreases
Elastic	Price decreases	Revenue increases
Inelastic	Price increases	Revenue increases
Inelastic	Price decreases	Revenue decreases
Unitary elastic	Price changes	Revenue generally unchanged

Also read: Modern Revenue Management: New Strategies for 2026 

Why Is Price Elasticity of Demand Important? 

Elasticity is not just an economics concept used in exams. Businesses use it to understand customers and make pricing decisions. Governments can also use it when designing taxes and economic policies. 

Here are the main reasons it matters. 

1. Pricing Decisions 

A business should know how customers might react before changing its price. 

• If demand is highly elastic, even a small price increase could cause a significant fall in sales. 
• If demand is relatively inelastic, customers may continue buying despite a higher price. 

For example, a company selling a product with many competitors may need to keep its price competitive. Elasticity gives the business a better idea of how much pricing flexibility it has. 

2. Revenue Forecasting 

Businesses can use elasticity to estimate how a price change may affect sales and revenue. Suppose a company is considering a 10% price increase. 

• If demand is expected to be highly elastic, the company may forecast a large fall in sales. 
• If demand is inelastic, the expected fall may be much smaller. 

Elasticity does not provide a perfect forecast. Other factors can affect sales. Still, it gives businesses a useful starting point for planning. 

3. Government Taxation and Public Policy 

Governments also consider elasticity when deciding how to tax certain products. Products with inelastic demand may continue to be purchased even after a tax increases their prices. This can make them important sources of tax revenue. 

For example, governments may consider consumer responsiveness when designing taxes on products that have relatively stable demand. 

However, policymakers must also consider other effects, such as consumer welfare, affordability, and changes in consumption. 

4. Business and Market Analysis 

Elasticity can help businesses understand their market. It can reveal how sensitive customers are to price and how easily they may switch to competitors. 

Businesses can use this information when studying: 

• Customer behaviour 
• Competitor pricing 
• Market competition 
• Product positioning 
• Revenue opportunities 
• Pricing strategies 

For example, if customers quickly move to competitors after a small price increase, the company may need to focus on product quality, service, or differentiation rather than simply raising prices. 

Also read: 6 Must-Know Types of Supply Chain Models 

Price Elasticity of Demand vs Other Types of Elasticity 

Price elasticity is not the only type of elasticity used in economics. Different measures look at different factors that can affect demand or supply. 

1. Cross-Price Elasticity of Demand 

Cross price elasticity of demand measures how the quantity demanded of one product changes when the price of another product changes. 

The formula is: 

Cross-Price Elasticity = % Change in Quantity Demanded of Product X / % Change in Price of Product Y 

It helps identify whether two products are substitutes or complements. 

• Positive value: Products are usually substitutes. 
• Negative value: Products are usually complements. 
• Zero or close to zero: The products may have little relationship. 

For example, tea and coffee can be substitutes. If the price of tea increases, some consumers may buy more coffee instead. 

2. Income Elasticity of Demand 

Income elasticity of demand measures how demand changes when consumer income changes. 

The formula is: 

Income Elasticity = % Change in Quantity Demanded / % Change in Income 

For example, if a person's income increases and they start eating at restaurants more often, demand for restaurant meals has increased with income. 

This measure helps businesses understand how demand may change as consumers' purchasing power changes. 

3. Price Elasticity of Supply 

Price elasticity of supply measures how much quantity supplied changes when the price of a product changes. 

The formula is: 

Price Elasticity of Supply = % Change in Quantity Supplied / % Change in Price 

For example, if the price of a product rises and manufacturers can quickly increase production, supply is relatively elastic. 

The key difference is simple: 

Type	Measures Response To	Measures Change In
Price elasticity of demand	Price	Quantity demanded
Cross-price elasticity	Price of another product	Quantity demanded
Income elasticity	Income	Quantity demanded
Price elasticity of supply	Price	Quantity supplied

 Also read: Inventory Management Made Easy: Complete 2025 Guide 

Limitations of Price Elasticity of Demand 

Price elasticity is useful, but it does not provide a perfect picture of consumer behaviour. Several limitations can affect its accuracy. 

1. Difficulty in Measuring Elasticity 

Calculating elasticity requires reliable price and sales data. 

However, sales can change because of many factors at the same time. Advertising, competition, income, seasonality, and consumer preferences can all affect demand. 

This makes it difficult to measure the exact effect of a price change. 

2. Changing Consumer Behaviour 

Consumer behaviour does not remain constant. 

A product may have inelastic demand today but become more elastic when new substitutes enter the market. 

Brand preferences, technology, trends, and changing lifestyles can also affect how consumers respond to prices. 

Therefore, an elasticity estimate should not be treated as a permanent number. 

3. Short-Run vs Long-Run Elasticity 

Elasticity can differ between the short run and long run. 

In the short run, consumers may have limited alternatives. They may continue buying a product even after a price increase. 

Over time, they can find substitutes, change habits, or adopt new products. 

For example, after a fuel price increase, consumers may continue driving initially. Over time, some may switch to public transport or other alternatives. 

This is why businesses should consider the time period when using elasticity for pricing decisions. 

Also read: Master the Supply Chain Management Process Step-by-Step 

Conclusion 

Price elasticity of demand helps us understand how strongly consumers respond to price changes. Its value can show whether demand is elastic, inelastic, or unitary elastic. Factors such as substitutes, product necessity, income, time, number of uses, and brand loyalty can influence the result. 

Central idea is elasticity tells us how much quantity demanded responds when price changes. Once you understand this relationship, the different formulas, graphs, examples, and applications become much easier to understand. 

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