Qd ÷ ΔP

Written By Umut Kural

“How price changes make or break demand—in one simple formula”

Price elasticity of demand is a fundamental concept in economics that measures how sensitive the quantity demanded of a good or service is to changes in its price. Whether you're a business owner, marketer, or economics student, understanding this principle can help you make better pricing decisions and predict consumer behavior.

Price elasticity of demand (PED) is calculated as:

% change in quantity demanded divided by the % change in price

The result determines whether demand is:

  • Elastic (PED > 1): A small price change leads to a significant change in demand.

  • Inelastic (PED < 1): Demand changes only slightly, even with large price fluctuations.

  • Unitary Elastic (PED = 1): The percentage change in demand equals the percentage change in price.

Example: Hotel Prices (Elastic Demand – PED > 1)

A Hotel raises prices by 10% for the weekend compared to the last weekend.

Demand drops by 20% compared to the last weekend, because guests have switched to the competitor.

Conclusion: Raising prices could hurt revenues, however may increase profitability.

Example: Luxury Handbags (Inelastic Demand – PED < 1)

A high-end brand (e.g., Louis Vuitton) raises prices by 10%.

Demand drops only by 2%, because the value of the product is still high and the sensitivity of the consumers are low.

Conclusion: Raising prices does not significantly impact volumes, increasing revenues and profits.

Let’s Analyze Your Price Elasticity—and Unlock Hidden Revenue.

Umut Kural