When New York City raised subway fares by 4 percent in 2023, ridership barely changed — commuters kept riding because they had few alternatives during peak hours. When a grocery store raised the price of a branded cereal by the same 4 percent, unit sales fell noticeably as shoppers shifted to store-brand alternatives. Same price increase, very different responses. The difference is price elasticity of demand.
The formula
Price Elasticity of Demand (PED) = % Change in Quantity Demanded ÷ % Change in Price
Because demand curves slope downward, a price increase causes quantity demanded to fall — the formula produces a negative number. Economists typically report the absolute value |PED| for simplicity.
If the price of a good rises 10 percent and quantity demanded falls 5 percent: PED = –5% ÷ 10% = –0.5 → |PED| = 0.5 (inelastic)
If the price rises 10 percent and quantity demanded falls 20 percent: PED = –20% ÷ 10% = –2.0 → |PED| = 2.0 (elastic)
Reading the result
| |PED| value | Classification | Revenue effect of a price increase | |---|---|---| | > 1 | Elastic | Revenue falls (quantity falls more than proportionally) | | = 1 | Unit elastic | Revenue unchanged | | < 1 | Inelastic | Revenue rises (quantity falls less than proportionally) | | = 0 | Perfectly inelastic | Quantity doesn't change at all |
The Bureau of Labor Statistics Consumer Expenditure Survey provides the spending data that allows elasticity estimation across hundreds of consumer good categories — gasoline, healthcare, and utilities consistently show inelastic demand; recreation, clothing, and dining out show more elastic demand.
Worked example
A pharmacy charges $8 for a generic allergy medication. At that price it sells 500 units per week. It raises price to $10. Weekly sales fall to 450 units.
- % change in price: (10 – 8) ÷ 8 × 100 = +25%
- % change in quantity: (450 – 500) ÷ 500 × 100 = –10%
- PED = –10% ÷ 25% = –0.4 → |PED| = 0.4 (inelastic)
Revenue before: 500 × $8 = $4,000. Revenue after: 450 × $10 = $4,500. The price increase raised revenue, consistent with inelastic demand.
Where it's used
Firms use PED to set prices: sellers of inelastic goods (pharmaceuticals, utilities, gasoline) can raise prices to increase revenue; sellers of elastic goods must hold prices to maintain volume. The IRS's excise tax policy targets inelastic goods (tobacco, alcohol, gasoline) specifically because inelastic demand means the tax raises revenue without eliminating the taxed activity. The EPA uses elasticity estimates to predict how carbon pricing will reduce emissions — the more elastic the demand for energy, the more behavior changes per dollar of carbon price.
