Price Elasticity of Demand (PED) is a vital economic metric that measures how sensitive the quantity demanded of a good is to a change in its price. For businesses, understanding PED is essential for making informed pricing decisions and forecasting revenue.
The Midpoint Formula for PED
This calculator uses the Midpoint Method (also known as Arc Elasticity). This method is preferred by economists because it gives the same elasticity value regardless of whether the price increases or decreases.
Consumers are very sensitive to price changes. Small price drops lead to large demand spikes.
Less than 1
Inelastic
Consumers are not very sensitive. Demand stays relatively stable even if price changes.
Equal to 1
Unitary Elastic
Percentage change in quantity is exactly equal to the percentage change in price.
Equal to 0
Perfectly Inelastic
Demand does not change regardless of price (e.g., life-saving medicine).
Real-World Example
Imagine a local coffee shop sells 200 lattes a day at $5.00 each. They decide to raise the price to $6.00. Following the price hike, they only sell 150 lattes a day.
Initial Price (P1): 5.00
New Price (P2): 6.00
Initial Quantity (Q1): 200
New Quantity (Q2): 150
Using the midpoint formula, the PED would be approximately 1.57. Since 1.57 is greater than 1, the demand for their lattes is elastic. The coffee shop might actually lose total revenue by raising prices in this scenario.
Factors Influencing PED
Several factors determine whether a product is elastic or inelastic:
Availability of Substitutes: If there are many alternatives, demand is usually elastic.
Necessity vs. Luxury: Necessities (like bread or insulin) are usually inelastic; luxuries (like cruises) are elastic.
Proportion of Income: Items that take up a large chunk of a consumer's budget tend to be more price-sensitive.
Time Period: In the long run, demand becomes more elastic as consumers find ways to adapt to price changes.
function calculatePED() {
var p1 = parseFloat(document.getElementById('p1').value);
var p2 = parseFloat(document.getElementById('p2').value);
var q1 = parseFloat(document.getElementById('q1').value);
var q2 = parseFloat(document.getElementById('q2').value);
var resultBox = document.getElementById('ped-result-box');
var resultValue = document.getElementById('ped-value');
var interpretationText = document.getElementById('ped-interpretation');
if (isNaN(p1) || isNaN(p2) || isNaN(q1) || isNaN(q2)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (p1 === p2) {
alert("Initial Price and New Price cannot be the same for this calculation.");
return;
}
if ((q1 + q2) === 0 || (p1 + p2) === 0) {
alert("Invalid quantity or price sums.");
return;
}
// Midpoint Method Calculation
var quantityChange = (q2 – q1) / ((q1 + q2) / 2);
var priceChange = (p2 – p1) / ((p1 + p2) / 2);
var ped = quantityChange / priceChange;
var absPed = Math.abs(ped);
resultBox.style.display = 'block';
resultValue.innerText = absPed.toFixed(2);
var category = "";
var explanation = "";
if (absPed === 0) {
category = "Perfectly Inelastic";
explanation = "Demand does not change at all when price changes. This is rare and typically applies to highly unique, life-essential goods.";
} else if (absPed > 0 && absPed 1 && isFinite(absPed)) {
category = "Elastic Demand";
explanation = "The percentage change in quantity demanded is greater than the percentage change in price. Consumers are very sensitive to price movements.";
} else if (!isFinite(absPed)) {
category = "Perfectly Elastic";
explanation = "Any increase in price will cause demand to drop to zero. Typically seen in perfectly competitive markets.";
}
interpretationText.innerHTML = "Category: " + category + "" + explanation;
// Smooth scroll to result
resultBox.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}