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Price Elasticity of Demand (PED) Calculator

Responsiveness of quantity demanded to a change in price.

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PED

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Overview

Price Elasticity of Demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It quantifies how consumers' purchasing habits shift when prices fluctuate, allowing economists to categorize goods as either elastic or inelastic.

Symbols

Variables

PED = PED, \%\Delta QD = %Δ Quantity, \%\Delta P = %Δ Price

PED
%Δ Quantity
%Δ Price

Apply it well

When To Use

When to use: Apply this equation when predicting how a price adjustment will impact the total units sold in a specific market. It is most effective in scenarios where the Law of Demand holds and other variables like consumer income or preference remain constant.

Why it matters: This calculation allows businesses to set prices that maximize revenue based on consumer sensitivity to cost. It also helps policymakers understand which products can be taxed effectively, such as alcohol or tobacco, without causing a total collapse in demand.

Avoid these traps

Common Mistakes

  • Swapping the numerator and denominator.
  • Forgetting to use percentage changes.

One free problem

Practice Problem

A local coffee shop increases the price of its signature latte by 8%, which leads to a 4% decrease in the number of lattes sold. Calculate the Price Elasticity of Demand.

%Δ Price8 %
%Δ Quantity-4 %

Solve for:

Hint: Divide the percentage change in quantity demanded by the percentage change in price.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Mankiw, N. Gregory. Principles of Economics.
  2. Wikipedia: Price elasticity of demand
  3. Britannica: Elasticity (economics)
  4. Mankiw, N. Gregory. Principles of Economics. Cengage Learning.
  5. McConnell, Campbell R., Brue, Stanley L., & Flynn, Sean M. Economics: Principles, Problems, and Policies. McGraw-Hill Education.
  6. Mankiw, N. Gregory. Principles of Economics. 9th ed. Cengage Learning, 2021.
  7. Parkin, Michael. Economics. 14th ed. Pearson, 2020.
  8. Wikipedia: Giffen good