Price Elasticity of Demand (Ed) is a fundamental concept in microeconomics that measures how sensitive the quantity demanded of a good or service is to a change in its price. In simpler terms, it tells us how much the demand for a product will change if its price goes up or down.
The formula for calculating Price Elasticity of Demand, using the midpoint method (which is generally preferred for its accuracy across different price points), is:
The result of the calculation indicates the nature of the demand:
|Ed| > 1: Elastic Demand. A small change in price leads to a larger change in quantity demanded. Consumers are very responsive to price changes. (e.g., luxury goods, goods with many substitutes).
|Ed| < 1: Inelastic Demand. A change in price leads to a smaller proportional change in quantity demanded. Consumers are not very responsive to price changes. (e.g., necessities like basic food, medicine).
|Ed| = 1: Unit Elastic Demand. The percentage change in quantity demanded is exactly equal to the percentage change in price.
|Ed| = 0: Perfectly Inelastic Demand. Quantity demanded does not change at all, regardless of price changes (very rare in reality).
|Ed| = ∞: Perfectly Elastic Demand. Any increase in price causes demand to drop to zero (also rare).
Why is this important? Businesses use Ed to make pricing decisions. If demand is elastic, raising prices might significantly reduce sales and revenue. If demand is inelastic, businesses may have more flexibility to raise prices without losing many customers, potentially increasing revenue. Governments also use elasticity concepts for tax policy.
Example Calculation:
Suppose a coffee shop sells 100 cups of coffee per day at $3.00 per cup (Q1=100, P1=3.00). They decide to raise the price to $3.50, and the quantity demanded drops to 80 cups per day (Q2=80, P2=3.50).
Since the absolute value of Ed (| -1.44 | = 1.44) is greater than 1, the demand for coffee in this scenario is considered elastic. A price increase led to a proportionally larger decrease in quantity demanded.
function calculateElasticity() {
var initialQuantity = parseFloat(document.getElementById("initialQuantity").value);
var finalQuantity = parseFloat(document.getElementById("finalQuantity").value);
var initialPrice = parseFloat(document.getElementById("initialPrice").value);
var finalPrice = parseFloat(document.getElementById("finalPrice").value);
var resultDiv = document.getElementById("result-value");
// Input validation
if (isNaN(initialQuantity) || isNaN(finalQuantity) || isNaN(initialPrice) || isNaN(finalPrice)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (initialQuantity <= 0 || finalQuantity <= 0 || initialPrice <= 0 || finalPrice 1) {
resultText += "Elastic Demand)";
} else if (absElasticity < 1) {
resultText += "Inelastic Demand)";
} else {
resultText += "Unit Elastic Demand)";
}
resultDiv.innerHTML = resultText;
}