Elasticity of Demand Calculator
Try an example
Price elasticity of demand (midpoint method)
-1.59
Demand is elastic: quantity changes by a larger percentage than price.
%ΔQ = (350 − 500) ÷ 425 = -35.3%; %ΔP = (5 − 4) ÷ 4.5 = 22.2%; E = -35.3% ÷ 22.2% = -1.59
Measured from the first point instead of the midpoint, the elasticity is -1.2. Many textbooks quote the absolute value, 1.59.
What happened to revenue
$2,000 → $1,750
Revenue fell by $250 (-12.5%). With elastic demand, revenue moves opposite to price: a price cut brings in more, a price rise less.
Calculate the price elasticity of demand between two price and quantity points with the midpoint method, see whether demand is elastic or inelastic, and what the price change did to revenue.
Formula
Worked Example
Quantity fell 150 ÷ 425 = 35.3% while price rose 1 ÷ 4.5 = 22.2%, so E = −35.3 ÷ 22.2 = −1.59. Because demand is elastic, the price rise lost more in sales than it gained per cup, and revenue fell 12.5%.
Frequently Asked Questions
Why use the midpoint method?
It measures both percentage changes against the average of the two points, so the answer is the same whether the price rises or falls. Measured from the starting point instead, the coffee example gives −1.2 for a rise from $4 to $5 but −2.14 for a fall from $5 to $4.
What makes demand elastic or inelastic?
Demand is more elastic when there are close substitutes, when the item is a luxury or a large share of the budget, and over longer periods as people adjust. Necessities with few substitutes, such as gasoline or prescription drugs in the short run, tend to be inelastic.
How does elasticity affect revenue?
With elastic demand (|E| > 1), revenue moves opposite to price: cutting the price raises revenue. With inelastic demand (|E| < 1), revenue moves with price. At unit elasticity revenue stays about the same, which is where revenue is at its maximum.