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Introduction to price elasticity of demand

Learn about the price elasticity of demand, a concept measuring how sensitive quantity is to price changes. Elasticity is calculated as percent change in quantity divided by percent change in price. Elastic situations have elasticity greater than 1, while inelastic situations have elasticity less than 1. Elasticity varies along a demand curve, and different calculation methods exist.

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  • mr pants purple style avatar for user Vedhas Walke
    Just a theory:

    Can't you just calculate the slope of the line, and compare that slope to 1 to find out the elasticity?

    So, instead of

    (Q2 - Q1)/Q1
    ------------------ * 100% = Elasticity(demand)
    (P2 - P1)/P1

    use

    Q2 - Q1
    ---------- = Elasticity(demand)
    P2 - P1
    (12 votes)
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    • blobby green style avatar for user maronow
      No, you cannot use slope to represent elasticity. Elasticity is not comparing the nominal change in quantity to the nominal change in price. Rather, it compares the magnitude of change in quantity to the magnitude of change in price. Magnitude in this case is represented by percent change.
      We cannot really compare a change in the quantity of a good that someone purchases to the change in the price of the good, because quantity and price are measured in different units. It's comparing apples to dollars, for example. But percent change in quantity and percent change in price is the same units, so those can be compared.
      (6 votes)
  • boggle blue style avatar for user Aaron
    What if the absolute value of the price elasticity is 1?
    (7 votes)
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  • leafers seedling style avatar for user Raviverma.Chamarti
    When should we use the Midpoint Formula
    (8 votes)
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    • male robot hal style avatar for user John O'Malley
      The midpoint formula can be used in any case for price elasticity cases. However, as mentioned in the video, it is outside the current course. It is more accurate because you are looking at a more smaller change in price/demand, which is similar to when finding the slope of a curve using calculus. Using the formula for the coefficient of price elasticity on a PPF for specific points is easier and more intuitive, which is why it is first used.
      (3 votes)
  • piceratops seedling style avatar for user Manya
    kinda a weird question, but does elasticity have a unit?
    (4 votes)
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    • male robot hal style avatar for user John O'Malley
      It does. This can be done by doing unit analysis. The unit of the change in percentage of quantity demanded is the amount of that product (kg, cars, burgers, etc.). The unit of the change in percentage of price is the currency used, which often would be $. However, be noted that other relative prices could be used, such as other products.

      Hence, doing unit analysis, it can be concluded that the unit for elasticity is product unit/price (e.g. kg/$).
      (3 votes)
  • blobby green style avatar for user David Klatzkin
    Hi. Why in this video do they say put the original quantity in the denominator but then in future videos they say put the average in the denominator? thanks
    (3 votes)
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    • ohnoes default style avatar for user Noah L.
      In future videos it is likely that more "points" are being used. If it is just one quantity, then we would put the original quantity in the numerator; however, if you are comparing two different points, you calculate the percent change in price and put that in the numerator [This is known as the midpoint method].
      Also, I noticed in your question you said the original quantity is in the denominator. This is incorrect, because for Price Elasticity of Demand, Quantity goes in the numerator, and Price goes in the denominator.
      PED = %ChangeinQuantity/%ChangeinPrice
      (4 votes)
  • blobby green style avatar for user bradley urban
    I am a bit confused about what Sal was saying that the method that he is using to calculate price elasticity of demand will give you different results if you go from Price A to B or from Price B to A. In the video, when I calculate going from Price 8 to 9 and from quantity 4 to 2 (which is the reverse of what Sal did), I get the same answer.
    E = (4-2)/2 divided by (8-9)/9 = 1 divided by -1/9 = -9. Same answer as Sal in the video.

    Am I missing something?
    (3 votes)
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  • blobby green style avatar for user Seb Oliver
    why does the absolute value change the answers to positive? I would have assumed they were inelastic as they were negative?
    (1 vote)
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  • sneak peak green style avatar for user G. Tarun
    At , Sal says that an elasticity lesser than one implies that the good or service in question is inelastic. So does that mean the two elasticities we calculated here — -9 and -0.25 — are both inelastic?

    Does being lesser than 1 mean the number can be a positive decimal number (like 0.2, 0.8, and 0.9) as well as a negative number (-1)?
    (2 votes)
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  • male robot hal style avatar for user the learning guy
    Can you label a product as elastic or inelastic? *(Eg: X product is generally more elastic than Y product)

    I am a little confused about how to use the terminology relevant to this video (in, say, a conversational setting).
    (2 votes)
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  • blobby green style avatar for user 220070457
    What happens when there's an overproduction of goods and affects the eployees incomes?
    (2 votes)
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Video transcript

- [Instructor] We are now going to discuss price elasticity of demand, which sounds like a very fancy concept, but really, it's a way for economists to sense how sensitive is quantity to change in prices. And in this video, we're gonna denote it as a capital E, so E, price elasticity of demand. And the easy way to think about it is it is your percent change in, I'll use the Greek letter delta as shorthand for change in here, percent change in quantity over your percent change in price. And so, you might say, wait, how does this relate to the everyday idea of elasticity? Well, imagine two bands. So, let's imagine an inelastic band, inelastic, right over here, and let's imagine an elastic band right over here. So, in an inelastic band, if we apply some amount of force, you're not going to be able to stretch it much, it might stretch a little bit, while an elastic band, if you apply that same amount of force, you might be able to stretch it a lot more. And so, the analogy here is we're not using force, but we're saying how much does quantity stretch for a given amount of price change? And so, something where the quantity changes a lot for a given price change would be very elastic. So, this, the magnitude of this will be larger. And if the percent change in quantity doesn't change a lot for a our given percent change in price, well, then we're dealing with an inelastic price elasticity of demand. And we'll be able to internalize these more as we work through the numbers. And actually, let's do that for this demand schedule that we have right over here, and it's visualized as our demand curve. In the vertical axis, we have price of burgers; and then in our horizontal axis, we have quantity, in terms of burgers per hour. And so, let's just use this definition of price elasticity of demand to calculate it across different points on our demand curve. So, I'm gonna make a new column here, so price elasticity of demand. And the way I'm gonna do it is really the simplest method for calculating this. In other videos, we can go into more in-depth methods, like the midpoint method. And I'll show you the weakness in what we're doing right here. But for the sake of, say, an AP economics, microeconomics course, this would be sufficient. So, let's think about our price elasticity of demand as we go from point A to point B. Well, remember, that's just going to be our percent change in quantity over our percent change in price. So, what is our percent change in quantity? Well, we're starting at a quantity of two, so I'll put that in our denominator. And we're going from two to four, so we are adding two. So, we have two over two, we could multiply that times 100% if we like. So, this would give us, we have 100% change in quantity over, now what was the corresponding change in price, percent change in price? So, our corresponding percent change in price, our initial price is nine, and we go from nine to eight, so we're going down by one. And then we multiply that times 100%. So, this is going to be about a negative 11% change in price. And this math is reasonably straightforward because the 100%s cancel out, this is just a one. One over negative 1/9 is just going to be equal to negative nine. So, you have a negative nine price elasticity of demand. So, before I interpret that more, let's look at the price elasticity of demand at other points, or starting from other points to other points on this curve. So, let's think about it going from, actually let's think about it going from E to F. So, as we go from E to F, we're going to do the same exact exercise. What is our percent change in quantity? Well, our initial quantity is 16. And we're going from 16 to 18, so we have a change of two. So, two over 16 times 100%, that is our percent change in quantity. And what is our percent change in price? Well, our initial price is two. And we're going from two to one, so we have a price change of negative one times 100%. And so, what you see here is this is 1/8 times 100%, this would be 12.5% up here. So, this is 12.5% up there, and then this, over here, is going to be negative 50%. So, when price went down by 50%, you had a 12.5% increase in quantity. 12.5% is 1/4 of 50%, so this is going to give us a price elasticity of demand of negative 0.25. So, there's a couple of interesting things that you might already be realizing. One is even though our demand curve right over here is a line, it actually has a constant slope, you see that the price elasticity of demand changes, depending on different parts of the curve. Now, the reason why this is, is really just boils down to math. When we're going from A to B, our initial prices were relatively high. So, even though you had a price decrease of one, it was from an initial price of nine. So, your percentage change in price looked fairly low, while your percentage change in quantity was high 'cause you're going from a low quantity of two, and you're adding two to it, so you had 100% change in quantity. When you go to the other end our curve, and you go from E to F, it's the other way around. Your price starting point is low, so your percent change in price, when you decrease price by one, it looks like a fairly large magnitude; while your percent change in quantity when you go from E to F because you are already at a quantity of 16, adding two to that is not that large of a percentage. Now, another thing you might be appreciating is if we tried to calculate the price elasticity of demand up here on the curve, and instead of going from A to B, if we went from B to A, we would've gotten a different value because our initial prices and quantities would have been different. Our initial price, we would've put an eight right over here, and our initial quantity, we would've put a four over here, and we would've gotten a different value. And that's one of the negatives of the technique, which is arguably the simplest technique, that I just used. There's other techniques, like the midpoint technique, that can give you a more consistent result, whether you're going from A to B or B to A, but I won't cover it just yet. But let's think, now, about how to interpret this. And the best way to interpret it is to think about the absolute value of the price elasticity of demand. So, over here, the absolute value of our price elasticity of demand is equal to nine, and then, over here, the absolute value of our price elasticity of demand is equal to 0.25. And a general rule of thumb is if your absolute value of your price elasticity of demand is less than one, you are dealing with an inelastic, inelastic, elastic situation; and if your price elasticity of demand, the absolute value of it, is greater than one, you're dealing with an elastic situation. Why does that make sense? Well, in this first scenario, it's saying for a given percentage change in price, you have a smaller percent change in quantity; while here, for a given percent in price, you're going to have a larger than that percentage change in your quantity. So, once again, it goes back to these rubber band analogies. So, when we're going from A to B, the absolute value of our price elasticity of demand is definitely larger than one. So, economists would consider this to be an elastic situation; while when we go from point E to point F, our price elasticity of demand, or the absolute value of it, is definitely less than one, so this going to be an inelastic situation.