Price Elasticity of Demand Calculator

This calculator uses the arc elasticity formula, commonly known as the midpoint method, to determine sensitivity between two distinct price and quantity points. The formula is expressed as PED = ((Q1 - Q0) / (Q1 + Q0)) / ((P1 - P0) / (P1 + P0)). Here, P0 and Q0 represent the initial price and quantity, while P1 and Q1 represent the new price and quantity. Total revenue is calculated at each step using Revenue = Price * Quantity, allowing you to instantly assess revenue growth or decline.

Imagine a local coffee shop currently sells 1,000 cups of specialty coffee per week at $4.00 per cup (Initial Revenue = $4,000). The owner decides to increase the price to $5.00 per cup, causing weekly sales to drop to 700 cups (New Revenue = $3,500). Applying the midpoint formula: quantity change percentage is ((700 - 1000) / (700 + 1000)) = -0.1765. Price change percentage is ((5 - 4) / (5 + 4)) = 0.1111. Dividing -0.1765 by 0.1111 yields a Price Elasticity of Demand (PED) of approximately -1.59. Because the absolute value is greater than 1, demand is elastic, meaning the price hike ultimately reduced total revenue by 12.5%.

When analyzing elasticity, always look at the absolute value of the PED coefficient rather than its negative sign. For elastic goods (absolute value greater than 1), raising prices will typically decrease total revenue, whereas lowering prices can boost volume and overall income. For inelastic goods like essential utilities or medications, price increases generally drive higher total revenue because consumer demand remains stable despite higher costs.