## Defining Price Elasticity of Demand

### Measuring the Price Elasticity of Demand

The price elasticity of demand (PED) is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

#### LEARNING OBJECTIVES

Calculate the own-price elasticity of demand

#### KEY TAKEAWAYS

##### Key Points

- PED captures the change in quantity demanded in response to a change in the good's own price (as opposed to the price of some other good).
- The formula for price elasticity yields a value that is negative, pure, and ranges from zero to negative infinity.
- The result provided by the formula will be accurate only if the changes in price and quantity demanded are small.

##### Key Terms

**Own-price elasticity of demand**: Responsiveness of quantity demanded to a change in the good's own price**Cross-price elasticity of demand**: Measures the responsiveness of the demand for a good to a change in the price of another good.

The price elasticity of demand (PED) captures how price-sensitive consumers are for a given product or service by measuring the responsiveness of quantity demanded to changes in the good's own price. This is in contrast to measuring the responsiveness of the good's demand to a change in price for some other good (a complement or substitute), which is called the cross-price elasticity of demand. The own-price elasticity of demand is often simply called the price elasticity.

The following formula is used to calculate the own-price elasticity of demand:

The formula above usually yields a negative value because of the inverse relationship between price and quantity demanded. However, economists often disregard the negative sign and report the elasticity as an absolute value. For example, if the price of a good increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity at the initial price and quantity is -5%/5% = -1. This number is likely to be reported simply as 1.

**Sale**: There is an inverse relationship between price and quantity demanded, so the elasticity coefficient is almost always negative.

There are a few other important points to note about the coefficient value provided by this formula. First, the elasticity coefficient is a pure number, meaning that it does not have units of measurement associated with it. Second, the coefficient value can range from zero to negative infinity. Finally, the result provided by the formula will be accurate only when the changes in price and quantity are small. The result will be less accurate when the changes are large.

Since PED is based off of percent changes, the starting nominal quantity and price matter. At low prices and high quantities, the PED is therefore more inelastic. For example, a drop in the price of $1 from a starting price of $100 is a 1% drop, but if the starting price is $10, it is a 10% drop. Similarly, at high prices and low quantities, PED is more elastic.

**Price Elasticity of Demand and Revenue**: PED is based off of percent changes, so the starting nominal values of price and quantity are significant.