Percent change in quantity, over percent change in price
Elasticity measures how much the quantity people buy responds to a change in price. A 10% price rise that cuts sales 15% gives −15 ÷ 10 = −1.5. It comes out negative because price up means quantity down — the sign is expected, so you judge by the absolute value.
The number 1 is the dividing line
The whole classification hangs on whether |PED| sits above or below 1. That single threshold decides whether cutting or raising the price grows your revenue.
Elastic demand (luxuries, eating out) loses more sales than it gains in price, so raising prices cuts revenue. Inelastic demand (fuel, milk, cigarettes) barely drops, so a price rise lifts revenue.
Real-world elasticities
| Product | PED | Type |
|---|---|---|
| Salt / eggs | −0.1 | Very inelastic |
| Gasoline | −0.2 | Inelastic |
| Cigarettes | −0.4 | Inelastic |
| Milk | −0.6 | Inelastic |
| Beef | −0.9 | Near unit |
| Fresh produce | −1.2 | Elastic |
| Restaurant meals | −2.3 | Very elastic |
Necessities with few substitutes sit near zero; discretionary goods with easy alternatives run above 1. These shift over time and by market, so treat them as guides.
What people get wrong
- Dropping the sign. PED is normally negative. |PED| = 2 is elastic, not inelastic — compare the size, keep the minus in mind.
- Point vs midpoint. The simple percent method gives a different answer depending on whether the price went up or down. For changes above about 10%, the midpoint (arc) method uses the average of the two prices and quantities so the result is symmetric.
- Elasticity is local. A value measured between $10 and $12 does not hold at $5 or $50, and it drifts with season, income and competitor pricing.
Common questions
How do I calculate price elasticity of demand?
Divide the percent change in quantity by the percent change in price. If a 10% price rise causes a 15% drop in quantity sold, the elasticity is -15 divided by 10, which is -1.5.
Why is price elasticity of demand usually negative?
Because price and quantity move in opposite directions: raise the price and people buy less. That makes the ratio negative. In practice people compare the absolute value, so -1.5 is read as an elasticity of 1.5.
What is the difference between elastic and inelastic demand?
If the absolute value is above 1, demand is elastic, meaning buyers are sensitive to price. Below 1 it is inelastic, meaning price changes barely move quantity. Exactly 1 is unit elastic.
