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Price elasticity of demand

Price elasticity of demand is a measure of how much the number of units sold changes when the price of a product changes.

How it works

When a price goes up, fewer units usually sell; elasticity puts a number on that response. It is negative, since price and units sold move in opposite directions, and is often quoted without the minus. Below 1 (without the minus), demand is inelastic: sales fall by a smaller percentage than the price rose, so revenue grows. Above 1, demand is elastic, and the same price rise shrinks revenue.

There is no single benchmark: elasticity differs between products and, for one product, between price levels. That is one reason to change prices in steps.

Formula

% change in units sold ÷ % change in price

Ways to calculate

  • Simple percentage change — measured from the starting point, so a rise and a fall between the same two prices give different results.
  • Midpoint method — measured from the average of the two points, so both directions agree. OpenStax Principles of Economics uses it.

Example

Example store, not client data.

The tableware shop sold a dinner set 40 times a month at 600 and 38 times at 660: price +10%, sales −5%.

  • Simple: −5% ÷ 10% = −0.5; from 660 back to 600, +5.3% ÷ −9.1% = −0.58.
  • Midpoint: −5.1% ÷ 9.5% = −0.54, both ways.
  • Revenue: 24,000 before, 25,080 after.

Not to be confused with

  • Price competitiveness — where your price stands against other sellers: a market position, not how your sales respond to your own price change.

Right and wrong readings

  • Wrong: “Price up 10%, Shopping sales down 10%, so elasticity is −1.” Right: in Shopping ads the price is shown in the ad, so clicks can change too, and value-based bidding gets higher order values. Compare impressions and clicks for both periods first.
  • Wrong: “Products 20% above the market sell less, so my 20% rise will do the same.” Right: that compares different products, not one product over time. In our study of 1.4 million products, 11.7% of products more than 20% above the market had conversions, compared with 20.4% at market price. Yet price deviation and product status correlated at only r = −0.075.

Sources