Price elasticity of demand: calculation, interpretation and factors

The formula

PED = percentage change in quantity demanded / percentage change in price

Percentage change = (new - old) / old x 100.

PED is almost always negative, because price and quantity demanded move in opposite directions. When interpreting, it is the size of the number (ignoring the sign) that shows whether demand is elastic or inelastic, but keep the minus sign in a calculation.

Rearranged, it predicts sales: % change in quantity demanded = PED x % change in price.

Interpreting values

Factors influencing PED

Demand is more price elastic when:

• There are many close substitutes (one brand of petrol among many stations).
• The product takes a large proportion of income (cars, holidays).
• It is a luxury rather than a necessity.
• The time period is long, giving consumers time to find alternatives.
• It is defined narrowly (one brand rather than the whole product category).

Demand is more price inelastic when the product is a necessity or habit-forming (salt, fuel, cigarettes), has few substitutes, has a strong brand with loyal customers (the specification lists reduced PED as a benefit of strong branding), or takes a small share of income.

Worked example

A cinema raises its ticket price from $10 to $12 and weekly admissions fall from 5,000 to 4,500. Calculate PED and interpret it.

1. % change in quantity = (4,500 - 5,000) / 5,000 x 100 = -10%.
2. % change in price = (12 - 10) / 10 x 100 = 20%.
3. PED = -10 / 20 = -0.5.
4. Ignoring the sign, 0.5 is less than 1: demand is price inelastic.

Answer: PED = -0.5: price inelastic; admissions fell by a smaller percentage than the price rose.

Check yourself

1. A shop cuts the price of a T-shirt from $20 to $18 and sales rise from 400 to 480 a week. Calculate the PED.
   Show answer

   -2.0. %Qd = +20%; %P = -10%; PED = 20 / -10 = -2.

2. The price of a bus fare rises by 8% and the number of journeys falls by 2%. Calculate the PED.
   Show answer

   -0.25. -2 / 8 = -0.25.

3. A product has a PED of -1.6. The firm raises its price by 5%. Calculate the percentage change in quantity demanded.
   Show answer

   -8.0 %. %Qd = PED x %P = -1.6 x 5 = -8%.

4. A brand of toothpaste has a PED of -0.4. Sales are 20,000 tubes a month. The firm cuts its price by 10%. How many tubes will it now sell per month?
   Show answer

   20800 tubes. %Qd = -0.4 x -10 = +4%; 20,000 x 1.04 = 20,800.

5. A product has a PED of -2.5. Which is correct?
   • Demand is price inelastic
   • A price rise increases quantity demanded
   • Demand is price elastic: a 1% price rise reduces quantity demanded by 2.5%
   • Demand has unitary elasticity
   Show answer

   Demand is price elastic: a 1% price rise reduces quantity demanded by 2.5%. 2.5 is greater than 1 (ignoring the sign).

6. Which product is likely to have the most price inelastic demand?
   • Tap water supplied to homes
   • A particular brand of crisps
   • Foreign holidays
   • A specific model of designer trainers
   Show answer

   Tap water supplied to homes. A necessity with no close substitutes.

7. Explain why a strong brand tends to make demand more price inelastic.
   Show answer

   Loyal customers see the brand as different and better than substitutes, so they keep buying it even when the price rises.. Loyalty and perceived uniqueness mean fewer customers switch when price rises.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.