Business Economics · How competitive markets operate

Price Elasticity of Demand and Supply: Formula and Meaning

Q: How do I calculate price elasticity of demand?

Find the percentage change in quantity demanded and divide it by the percentage change in price. Use the old value as the base, or the midpoint if the question asks. Compare the absolute value with 1 to decide if demand is elastic or inelastic.

Q: What is the difference between elastic and inelastic demand?

With elastic demand, quantity changes by a bigger percentage than price, so |PED| is above 1. With inelastic demand, quantity changes by a smaller percentage, so |PED| is below 1. This decides whether a price rise increases or reduces revenue.

Q: What are the determinants of price elasticity of supply?

Spare capacity, stocks of finished goods, how easily inputs can be obtained, how quickly production can be changed, and the time period allowed. Supply is more elastic when firms can expand output quickly and cheaply.

Q: What do the signs of income and cross elasticity tell you?

A positive income elasticity means a normal good and a negative one means an inferior good. A positive cross elasticity means substitutes and a negative one means complements.

Updated 11 October 2026 · Fact-checked

Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Find the two percentage changes, divide, and read the size. Above 1 in absolute value means elastic, below 1 means inelastic. Supply elasticity uses quantity supplied in the same way.

Understand Price Elasticity of Demand and Supply

Elasticity measures how strongly one variable responds to a change in another. In CB2 it tells you how much buyers or sellers change their behaviour when price, income or another price changes. It uses percentage changes, so it does not depend on units such as rupees, kilograms or litres.

Price elasticity of demand (PED) is the percentage change in quantity demanded divided by the percentage change in price. For a normal downward-sloping demand curve, PED is negative. Many texts quote the absolute value. If |PED| > 1, demand is elastic: quantity falls by a larger percentage than price rises. If |PED| < 1, demand is inelastic. If |PED| = 1, demand is unit elastic.

PED matters for revenue. If demand is elastic, a price rise lowers total revenue, because the fall in quantity outweighs the higher price. If demand is inelastic, a price rise increases total revenue. At unit elasticity, revenue does not change. Demand is more elastic when close substitutes exist, when the good is a luxury, when it takes a large share of income, and when buyers have longer to adjust.

Income elasticity of demand (YED) is the percentage change in quantity demanded divided by the percentage change in income. It is positive for normal goods and negative for inferior goods. A value above 1 marks a luxury. Cross elasticity of demand (XED) is the percentage change in quantity demanded of good A divided by the percentage change in the price of good B. It is positive for substitutes and negative for complements.

Price elasticity of supply (PES) is the percentage change in quantity supplied divided by the percentage change in price. It is normally positive. Supply is more elastic when firms have spare capacity, stocks of goods, easy access to inputs, and more time to adjust. For tax incidence, the more inelastic side of the market bears more of the tax burden. If demand is less elastic than supply, buyers bear more of it. If supply is less elastic, sellers bear more.

Key rules to remember

Price elasticity of demand: PED = (% change in Qd) ÷ (% change in P); Usually negative. Compare the absolute value with 1.
Percentage change: % change = (new − old) ÷ old × 100; Using the old value as base gives point-style elasticity for a given change. Midpoint method uses the average of old and new.
Midpoint (arc) elasticity: E = [(Q2 − Q1) ÷ ((Q1 + Q2) ÷ 2)] ÷ [(P2 − P1) ÷ ((P1 + P2) ÷ 2)]; Gives the same value whichever direction the change goes. Use it when the question asks for arc elasticity.
Point elasticity: PED = (dQ/dP) × (P ÷ Q); Use when a demand function Q = f(P) is given.
Income elasticity of demand: YED = (% change in Qd) ÷ (% change in income); Positive: normal good. Negative: inferior good. Above 1: luxury.
Cross elasticity of demand: XED = (% change in Qd of A) ÷ (% change in price of B); Positive: substitutes. Negative: complements. Near zero: unrelated.
Price elasticity of supply: PES = (% change in Qs) ÷ (% change in P); Positive for an upward-sloping supply curve.
Revenue rule: |PED| > 1: price up, revenue down. |PED| < 1: price up, revenue up. |PED| = 1: revenue unchanged.; Reverse the direction for a price cut.
Total revenue: TR = P × Q; Use it to check any revenue conclusion numerically.

How to solve Price Elasticity of Demand and Supply questions

Use this order for any elasticity question, whether it is numerical or a short written explanation.

1Identify which elasticity is asked: price, income or cross, and demand or supply.
2Write down the old and new values of the variables. State which method you use: simple percentage change, midpoint, or point elasticity.
3Calculate the percentage change in quantity and the percentage change in the driving variable (price, income or other price).
4Divide quantity change by the driving variable change. Keep the sign.
5Interpret the result: elastic, inelastic or unit elastic for price. Normal, inferior or luxury for income. Substitute or complement for cross.
6Link to the consequence asked for: effect on total revenue, or which side bears a tax.
7State the answer with its sign, its meaning and any assumptions, such as ceteris paribus.

Quickest way: Percentage-change shortcut and revenue check

When to use it: Use in multiple-choice questions where you need the type of elasticity or the revenue effect quickly.

Compute both percentage changes roughly. Divide the quantity change by the price change.
Compare the absolute value with 1. This alone decides elastic or inelastic.
For revenue, ask whether the quantity percentage change is bigger than the price percentage change. If it is, revenue moves in the direction of quantity.
For income and cross elasticity, read only the sign first. It often decides the answer.
For tax incidence, the less elastic side pays more. Pick that side without calculating.

Common mistakes in Price Elasticity of Demand and Supply

Treating PED as the slope of the demand curve.
Both involve price and quantity changes, so they look alike.
Fix: Slope uses absolute changes. Elasticity uses percentage changes. A straight line has constant slope but varying elasticity.
Dropping the sign or misreading a negative value as inelastic.
A figure like −2 looks small.
Fix: Take the absolute value for PED before comparing with 1. Keep the sign for income and cross elasticity, where it carries meaning.
Using the wrong base for percentage change.
Students divide by the new value or mix bases for price and quantity.
Fix: Divide by the old value unless told to use the midpoint. Use the same method for both variables.
Getting the revenue effect backwards.
Students memorise 'elastic' without the direction of the price change.
Fix: Check with TR = P × Q. If demand is elastic, price and revenue move in opposite directions.
Assuming the buyer always pays most of a tax.
The tax is often collected from sellers, so students think sellers bear it.
Fix: Incidence depends on elasticity, not on who pays the government. The less elastic side bears more.
Confusing substitutes and complements in cross elasticity.
Students forget which sign goes with which.
Fix: Tea and coffee: price of one up, demand for the other up, so positive. Cars and petrol: negative.

Worked examples

Example 1

The price of a product rises from ₹50 to ₹60 and quantity demanded falls from 200 units to 170 units. Calculate PED using the simple percentage-change method, state whether demand is elastic or inelastic, and find the change in total revenue.

Show the solution

% change in price = (60 − 50) ÷ 50 × 100 = 20%.
% change in quantity = (170 − 200) ÷ 200 × 100 = −15%.
PED = −15% ÷ 20% = −0.75.
|PED| = 0.75, which is less than 1, so demand is inelastic over this range.
Old revenue = 50 × 200 = ₹10,000. New revenue = 60 × 170 = ₹10,200.
Revenue rises by ₹200, which agrees with the rule for inelastic demand.

Answer: PED = −0.75. Demand is inelastic. Total revenue rises from ₹10,000 to ₹10,200.

Example 2

A government imposes a per-unit tax on a good. Demand is relatively inelastic and supply is relatively elastic. Who bears the larger share of the tax? Also, when the price of good B rises by 10%, the quantity demanded of good A rises by 4%. Calculate the cross elasticity and state the relationship between A and B.

Show the solution

Tax incidence depends on relative elasticity. The less elastic side cannot easily change its behaviour, so it bears more of the tax.
Demand is the less elastic side here, so buyers bear the larger share through a higher price.
Sellers can reduce supply more easily, so they bear the smaller share.
XED = % change in Qd of A ÷ % change in price of B = 4% ÷ 10% = 0.4.
XED is positive, so A and B are substitutes.
The value is below 1, so the substitution link is fairly weak.

Answer: Buyers bear the larger share of the tax. XED = +0.4, so A and B are substitutes, with a modest response.

Exam tips

Show the formula, the percentage changes and the interpretation. Method marks are given even if the arithmetic slips.
State your method (simple or midpoint) in numerical answers. Use midpoint if the question says arc elasticity.
Always follow the number with a plain-language meaning, such as 'demand is inelastic, so revenue rises'.
In tax questions, link incidence to relative elasticity and say whether buyers or sellers bear more.
In written answers on determinants, give a reason for each one, such as availability of substitutes or time to adjust.

Practice questions from How competitive markets operate

Price Elasticity of Demand and Supply in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Price Elasticity of Demand and Supply: frequently asked questions

How do I calculate price elasticity of demand?

Find the percentage change in quantity demanded and divide it by the percentage change in price. Use the old value as the base, or the midpoint if the question asks. Compare the absolute value with 1 to decide if demand is elastic or inelastic.

What is the difference between elastic and inelastic demand?

With elastic demand, quantity changes by a bigger percentage than price, so |PED| is above 1. With inelastic demand, quantity changes by a smaller percentage, so |PED| is below 1. This decides whether a price rise increases or reduces revenue.

What are the determinants of price elasticity of supply?

Spare capacity, stocks of finished goods, how easily inputs can be obtained, how quickly production can be changed, and the time period allowed. Supply is more elastic when firms can expand output quickly and cheaply.

What do the signs of income and cross elasticity tell you?

A positive income elasticity means a normal good and a negative one means an inferior good. A positive cross elasticity means substitutes and a negative one means complements.