Elasticity Calculator (PED)

What is Price Elasticity of Demand?

Price Elasticity of Demand (PED) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price.

The Midpoint Formula

This calculator uses the Midpoint Method (also known as Arc Elasticity). This is preferred over the simple percentage change method because it gives the same answer regardless of whether the price rises or falls.

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

Interpreting the Results

Typically, we take the absolute value of PED (since demand curves usually slope negatively, the raw value is negative, but economists talk about it as a positive number).

• Elastic (PED > 1): Quantity changes by a greater percentage than price. These are usually luxury goods or goods with many substitutes. A price increase will decrease total revenue.
• Inelastic (PED < 1): Quantity changes by a smaller percentage than price. These are usually necessities (like insulin or tap water). A price increase will increase total revenue.
• Unit Elastic (PED = 1): Quantity changes by the exact same percentage as price. Total revenue remains maximized and unchanged.
• Perfectly Inelastic (PED = 0): Quantity does not change at all regardless of price. (Vertical demand curve).
• Perfectly Elastic (PED = ∞): Any price increase causes quantity demanded to drop to zero. (Horizontal demand curve).

Factors Affecting Elasticity

1. Availability of Substitutes: The more close substitutes, the more elastic the demand. If the price of Pepsi goes up, people easily switch to Coke.
2. Necessity vs. Luxury: Necessities tend to be inelastic; luxuries are elastic.
3. Definition of the Market: Broad markets (e.g., "food") are inelastic; specific markets (e.g., "vanilla ice cream") are elastic.
4. Time Horizon: Demand is more elastic over the long run. When gas prices rise, people eventually buy more fuel-efficient cars, but not immediately.