Price elasticity of demand (PED) tells you how strongly buyers react when the price changes. The calculation is short, and the interpretation is where the marks are.
This lesson belongs to demand and supply. Confirm with your teacher which formula form your syllabus uses, because some books use the simple method shown here and others use midpoints.
How do I calculate PED?
Use two steps. First find each percentage change, then divide quantity by price.
PED = percentage change in quantity demanded ÷ percentage change in price
Each percentage change is the change divided by the original value, times 100. Ignore the sign when you classify the result, unless your teacher asks you to keep it.
| Result | Name | Meaning |
|---|---|---|
| Greater than 1 | Elastic | Quantity reacts strongly |
| Less than 1 | Inelastic | Quantity reacts weakly |
| Equal to 1 | Unitary | Changes are in proportion |
Worked example 1: a rice seller
A fictional stall sells rice at RM10 a bag and buys in 500 bags a month. The price rises to RM12 and sales fall to 450 bags.
Percentage change in price: (12 − 10) ÷ 10 × 100 = 20%.
Percentage change in quantity: (450 − 500) ÷ 500 × 100 = −10%, a fall of 10%.
PED = 10 ÷ 20 = 0.5. Since 0.5 is below 1, demand is inelastic. Buyers cut back by only half as much as the price rose, perhaps because rice is a staple with few substitutes.
Revenue check: RM10 × 500 = RM5 000 before, RM12 × 450 = RM5 400 after. Revenue rose by RM400, which matches inelastic demand.
Worked example 2: a snack seller
A fictional snack stall sells a pack at RM5 and sells 80 packs a day. The price rises to RM6 and sales fall to 56 packs.
Percentage change in price: (6 − 5) ÷ 5 × 100 = 20%.
Percentage change in quantity: (56 − 80) ÷ 80 × 100 = −30%, a fall of 30%.
PED = 30 ÷ 20 = 1.5, so demand is elastic. Revenue: RM5 × 80 = RM400 before, RM6 × 56 = RM336 after. Revenue fell by RM64.
The same 20% price rise raised revenue in one market and lowered it in the other. The size of PED explains why.
The mistake: dividing by the wrong base
A common slip is to divide by the new value instead of the original. In the rice example that gives (12 − 10) ÷ 12 = 16.7% for price, and (450 − 500) ÷ 450 = 11.1% for quantity.
| Step | Wrong (new value) | Right (original value) |
|---|---|---|
| Price change | 16.7% | 20% |
| Quantity change | 11.1% | 10% |
| PED | 0.67 | 0.5 |
Both still say inelastic, but the number is wrong. Always divide by the starting value, and show the calculation so a marker can give method marks.
A second mistake is to compare the raw changes (RM2 and 50 bags) without turning them into percentages. Units differ, so only percentages can be compared.
How do I write the interpretation?
State the value, the name and the meaning in one sentence. For example: “PED is 0.5, so demand is inelastic, which means the percentage fall in quantity demanded is smaller than the percentage rise in price.”
Add the revenue effect when the question asks for it. Keep the wording tied to the numbers in the question.
Check yourself
A fictional bakery raises the price of a cake from RM8 to RM10. Weekly sales fall from 200 to 140 cakes. Calculate PED, classify it, and state what happens to revenue.
Answer
Price change: (10 − 8) ÷ 8 × 100 = 25%. Quantity change: (140 − 200) ÷ 200 × 100 = −30%.
PED = 30 ÷ 25 = 1.2, so demand is elastic.
Revenue: RM8 × 200 = RM1 600 before, RM10 × 140 = RM1 400 after. Revenue falls by RM200, as expected for elastic demand.
What to study next
Test the whole cluster with the demand and supply practice set, and explore curves in the supply-demand diagram reasoning explorer.
For a teacher to check your calculation steps, see online one-to-one Economics tuition.