Lesson preview · Price Elasticity Of Demand
Elastic vs Inelastic — and How to Calculate
~10 min · Free to read
Forget the five classifications for a second. In practice, the question economists ask most is: Is this good elastic or inelastic? There’s one clean rule based on the absolute value of PED.
Key Term
The Rule
→ Elastic (quantity reacts more than price) → Inelastic (quantity reacts less than price) → Unit elastic (they match exactly)
Think about the math. If , a 10% price increase causes a 20% drop in quantity — a bigger response than the price change. Consumers are sensitive. If , a 10% price increase only drops quantity by 3% — consumers barely notice.
Trap · Common Misconception
Elastic ≠ 'Big Change'
Students often think ‘elastic’ just means ‘price went up a lot’ or ‘quantity changed a lot.’ Wrong. Elasticity is about the ratio of the two percentages. A 50% price jump that causes a 50% quantity drop is only unit elastic — not elastic. What matters is whether the quantity response is bigger or smaller than the price change.
Computing PED. The formula is just a ratio of two percentages. Use for each one. Quantity goes on top, price on the bottom — never flip them.
Trap · Warning
Don't mix up the order
Quantity goes in the numerator. Price goes in the denominator. If you flip it, you’ll get the reciprocal and your classifications will be wrong. over — quantity responds to price.
The midpoint method. The simple formula has one annoying flaw: the answer depends on which direction you move. Going from 10 dollars to 12 dollars is a 20% increase, but going from 12 dollars to 10 dollars is only a 16.7% decrease — same two numbers, different percentages. The midpoint method fixes this directional bias by dividing by the average of the two values.
Key Term
Midpoint Formula
Use the average of the two values as the base. The result is the same whether price moves up or down — no directional bias.
Midpoint method — preferred when measuring elasticity between two specific points.
Tip
Simple vs midpoint — when to use which
Simple formula when you’re given percentages directly (or want a fast estimate). Midpoint method when you have two (price, quantity) data points and need a clean answer that doesn’t depend on direction.
Check yourself · no marks
Netflix raises its subscription price 5% and 2% of subscribers cancel. Elastic or inelastic?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
A ride-share app raises its average fare from 8 dollars to 10 dollars. Daily rides drop from 12,000 to 9,000. Using the midpoint method, calculate and classify the demand.
Practice · 1 / 5
A gym raises membership prices by 20%. Memberships fall by 8%. Demand is:
A coffee shop is considering a price change. Current price is 4 dollars per latte, and they sell 500 lattes per week. They try raising the price to 5 dollars and find that weekly sales drop to 400 lattes. Work through the full analysis.
Using the midpoint method, what is the % change in quantity demanded? (Enter as a positive percentage, e.g., 22.2)
What is the % change in price using the midpoint method?
Calculate . (Round to 2 decimals.)
At unit elasticity, what happens to total revenue when the price rises?
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