Price elasticity
Also: PED, Price elasticity of demand, Demand elasticity, Elasticite prix de la demande, Elasticite-prix
How sensitive demand is to a price change. High elasticity means customers react strongly to price increases.
What it is
Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes. It is expressed as a ratio:
- Price elasticity = (% change in quantity demanded) / (% change in price)
Because demand usually falls when price rises, the raw value is typically negative, so most people refer to its absolute value. The interpretation is simple:
- Elastic (value > 1): customers are very sensitive. A small price increase causes a larger percentage drop in units sold.
- Inelastic (value < 1): customers are not very sensitive. Price changes move volume only a little.
- Unit elastic (value = 1): the percentage changes match, so revenue stays roughly flat.
Why it matters
Elasticity is the bridge between pricing decisions and revenue. It tells you whether raising a price will grow or shrink total revenue, and whether a discount will pay for itself in extra volume.
- Inelastic products can often sustain price increases with limited volume loss.
- Elastic products may respond better to promotions, bundling, or volume plays.
- Elasticity is rarely constant: it varies by segment, channel, season, and competitor behavior.
How it is used in practice
- Pricing strategy: set list prices, discounts, and promotional depth.
- Revenue forecasting: predict volume impact before a price move.
- Segmentation: identify which customer groups tolerate higher prices.
- Experimentation: run A/B or geo tests to estimate elasticity empirically rather than assuming it.
Elasticity can be estimated from historical transaction data, controlled price tests, or econometric and machine learning models that isolate price effects from confounding factors (seasonality, marketing, stock-outs).
Worked example
A subscription service raises its price from 20 to 22 (a 10% increase). Monthly active subscribers fall from 10,000 to 9,300 (a 7% decrease).
- Elasticity = -7% / +10% = -0.7 (absolute value 0.7).
- Since 0.7 < 1, demand is inelastic.
Check the revenue impact:
- Before: 10,000 x 20 = 200,000
- After: 9,300 x 22 = 204,600
Revenue rose despite losing subscribers, which is the hallmark of inelastic demand. If elasticity had been 1.5 (elastic), the same price hike would have cut volume by 15%, pushing revenue down to 8,500 x 22 = 187,000. The same price move can help or hurt depending entirely on elasticity.