Price Elasticity
Price elasticity of demand measures how strongly the quantity demanded responds to a change in price, with other influences held constant.
What is Price Elasticity?
Elasticity compares percentage changes rather than dollar or unit changes. It helps describe whether a product’s demand is relatively sensitive to its price. The result belongs to a product, audience, period and price range; it is not a permanent characteristic of the entire store.
For ordinary downward-sloping demand, the signed result is negative: a higher price is associated with lower quantity. Reports often show its absolute magnitude instead. State which convention is being used.
Price elasticity = Percentage change in quantity ÷ Percentage change in price
For a finite change, the midpoint method calculates each percentage relative to the average of its starting and ending values. This gives the same magnitude when the direction is reversed.
A price change in a comparable test
In an illustrative controlled comparison, a skincare item rises from $20 to $22 and quantity falls from 1,000 to 900. Midpoint quantity change is −100 ÷ 950 = −10.53%; midpoint price change is $2 ÷ $21 = 9.52%. Elasticity is about −1.11, with an absolute magnitude of 1.11.
How to interpret it
An absolute magnitude above 1 is described as elastic: quantity responds proportionately more than price. Below 1 is inelastic, and 1 is unit elastic. These labels concern demand responsiveness, not gross margin or net profitability.
A revenue effect and a profit effect are different. In the example, revenue moves from $20,000 to $19,800. Profit could still improve if selling fewer units avoids enough variable cost. Elasticity informs the volume side of a price decision but does not replace the cost calculation.
An observed before-and-after comparison is not automatically a causal estimate. Advertising, seasonality, stock availability or competitor changes can move quantity at the same time as price. Isolate the price change or label the result as an association.
Do not extend a local estimate across an unlimited price range. A small increase near the current price may generate a different response from a large increase that changes the product’s competitive position.
Common mistakes
Dividing unit change by dollar change
Elasticity is dimensionless because it uses percentage changes. Raw units per dollar describe a slope, not elasticity.
Comparing different percentage methods silently
A starting-value calculation and a midpoint calculation can produce different answers for the same finite change. Name the method.
Definition reference: OpenStax: price elasticity and the midpoint method.