In a Nutshell
If you know about the law of supply and demand theoretically or intuitively, you must know that, in most cases, there is a negative relationship between price and demand. For most products, when the price rises, demand falls, and when the price falls, demand rises. But the law of demand doesn’t talk about the magnitude of that negative relationship between price and demand.
What is the magnitude of the change in demand corresponding to a 1% change in price?
When we are assessing how sensitive the demand for a product is to changes in its price, we are discussing the price elasticity of demand.
So basically, price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
The price elasticity of demand is calculated using the following formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
By using the midpoint formula, the formula can be broken down to this:
Numerator: (Current Quantity - Previous Quantity) / [(Current Quantity + Previous Quantity) / 2]
Denominator: (Current Price - Previous Price) / [(Current Price + Previous Price) / 2]
Since the relationship between price and demand in most cases is negative, the price elasticity of demand is usually negative. A price elasticity value of 1.0 indicates unit elasticity, and a value of less than 1.0 indicates inelasticity and more than 1.0 indicates elasticity. And in extreme cases, a price elasticity value of 0 indicates that prices are perfectly inelastic.
Calculate and Visualize Price Elasticity of Demand
Period | Price | Quantity |
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