How to Calculate Price Elasticity of Demand?
What is price elasticity of demand?
The price elasticity of demand is a measure of the responsiveness of quantity demanded of the product when changing the price of the considered commodity while all other factors are constant. To calculate price elasticity of demand, we should divide the percentage change in quantity demanded by the percentage change in price.
In other words, price elasticity of demand is defined as follows.
The price elasticity of demand measures the sensitivity of changes in the quantity of demand as the result of changes in the price of a particular good.
Related topics
Cross price elasticity of demand
The cross-price elasticity of demand describes how quantity demanded of a product is changing when the price of another commodity is changing while all other factors are constant. Cross price elasticity of demand formula is percentage of change in quantity demanded of the considering good/ Percentage of change in price of the another good
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Cross Price Elasticity of Demand Meaning, Formula & Calculations
The price elasticity of supply
The price elasticity of supply measures how responsive the quantity supplied of a product is when changing the price of it while all other factors are constant. According to price elasticity of supply formula, the price elasticity of supply is equal to the percentage of change in quantity supplied /Percentage of change in price.
Price elasticity of supply formula = Percentage of change in quantity supplied /Percentage of change in price.
Price Elasticity of Supply Meaning, Formula & Examples
What does a negative price elasticity of demand mean?
The price elasticity of demand is a generally negative number because usually there is an inverse relationship between price and demand.
When price of a particular good rising, demand of that good is decreasing
Is the price elasticity of demand always negative?
No, sometimes there may be a positive relationship between price and demand for a particular good (For goods such as GIffen goods)
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What is the difference between demand and quantity demanded?
Market Equilibrium – With Examples & Graph
What is the difference between supply vs quantity supplied?
How to calculate the price elasticity of demand?
To calculate price elasticity of demand, we should divide the percentage change in quantity demanded by the percentage change in price. So, the basic formula for price elasticity of demand is as follows.
Price elasticity of demand formula/ equation for price elasticity of demand
The basic formula for price elasticity of demand is,
Price Elasticity of Demand = Percentage of change in quantity demanded /Percentage of change in price.
Calculate price elasticity of demand with examples
Example 1:
Assume that government commissioned a research firm, Super Consulting, to conduct a study on the market demand for cigarettes in Malaysia. The firm reported that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?
Solution
According to the report of the firm, the price elasticity of demand for cigarettes is 0.4. And they expect to reduce smoking by 20 percent. look at the change in the price of cigarettes using the price elasticity of demand.
In the current situation, the price of the cigarette pack is $2. After reducing by 20% quantity demanded of the cigarettes, the price will increase by 50%. Then, the new price of cigarettes is $3.
Ways of calculating price elasticity of demand
Price elasticity of demand can be defined as the percentage of the quantity of demand change is divided by the percentage of the price change of the particular good when the other factors remain unchanged.
There are two major ways of calculating price elasticity of demand. They are,
1. Point price elasticity of demand
2. Arc price elasticity of demand.
Let’s discuss about them.
The mid-point method of calculating the price elasticity of demand
Arc price elasticity of demand in other words, midpoint price elasticity of demand calculates the elasticity at the central point between the two points of the demand curve.
The arc price elasticity of demand formula in other words, midpoint price elasticity of demand formula can be presented as follows
Example – Calculating the midpoint price elasticity of demand
P1 = $30
P2 = $27
Q1 = 5000
Q2 = 6000
ED =
Calculate the midpoint price elasticity of demand
The point method of calculating the price elasticity of demand
Point Elasticity calculates elasticity at a particular point of the demand curve.
Point price elasticity of demand formula is as follows
Example – Calculating the midpoint price elasticity of demand
P1 = $30
P2 = $27
Q1 = 5000
Q2 = 6000
ED =
Calculate the point price elasticity of demand at price $30
Factors that determine the price elasticity of demand
- Nature of the commodity
If the commodity is a necessity good (such as vegetables, medicines and so on), there is an inelastic price elasticity of demand. Because people are less price sensitive for these types of goods. But if the commodity is a comfort good, there is an elastic price elasticity of demand and if the commodity is a luxury good, there is a higher elastic price elasticity of demand (Chand, 2013).
- Time period
If long time period has been passed after the price changes, there is an elastic price elasticity of demand than in the short run.
