Price Elasticity of Demand (PED) is a fundamental economic concept that measures the responsiveness of the quantity demanded of a good or service 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 PED uses the percentage change in quantity demanded divided by the percentage change in price. For more accuracy, especially with larger price changes, the midpoint formula (or arc elasticity) is often preferred.
The result of the PED calculation indicates the nature of demand:
PED > 1 (Elastic Demand): A small change in price leads to a larger change in quantity demanded. Consumers are very sensitive to price changes.
PED < 1 (Inelastic Demand): A change in price leads to a smaller proportional change in quantity demanded. Consumers are not very sensitive to price changes.
PED = 1 (Unit Elastic Demand): The percentage change in quantity demanded is exactly equal to the percentage change in price.
PED = 0 (Perfectly Inelastic Demand): Quantity demanded does not change regardless of price changes (rare in reality, e.g., life-saving medicine).
PED approaches infinity (Perfectly Elastic Demand): Any increase in price causes demand to drop to zero (e.g., highly competitive markets with identical products).
Note: PED is usually expressed as a negative number because price and quantity demanded move in opposite directions (Law of Demand). However, for simplicity and comparison, we often look at the absolute value (magnitude) of PED.
Use Cases for Businesses:
Pricing Strategy: Helps businesses determine how price changes will affect sales volume and total revenue. For elastic goods, raising prices might decrease revenue; for inelastic goods, it might increase revenue.
Forecasting: Predicts how demand might shift based on anticipated price adjustments or competitor pricing.
Marketing Decisions: Understands consumer sensitivity and can inform promotional strategies.
Government Policy: Useful for analyzing the potential impact of taxes (e.g., on cigarettes or gasoline) on consumption.
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");
var interpretationDiv = document.getElementById("interpretation");
// Clear previous results
resultDiv.innerText = "–";
interpretationDiv.innerText = "";
// Input validation
if (isNaN(initialQuantity) || isNaN(finalQuantity) || isNaN(initialPrice) || isNaN(finalPrice)) {
interpretationDiv.innerText = "Please enter valid numbers for all fields.";
return;
}
if (initialQuantity <= 0 || finalQuantity <= 0 || initialPrice <= 0 || finalPrice 1) {
interpretation = "Demand is **Elastic**. Quantity demanded changes more than proportionally to price changes.";
} else if (absElasticity 1000) { // Approaching perfectly elastic
interpretation = "Demand is very close to **Perfectly Elastic**. Consumers are extremely sensitive to price.";
} else if (elasticity < -1000) { // Approaching perfectly elastic (negative large)
interpretation = "Demand is very close to **Perfectly Elastic**. Consumers are extremely sensitive to price.";
} else if (absElasticity < 0.01) { // Approaching perfectly inelastic
interpretation = "Demand is very close to **Perfectly Inelastic**. Quantity demanded is largely unresponsive to price changes.";
}
interpretationDiv.innerHTML = interpretation;
}