How to Calculate Price Elasticity of Demand
Price elasticity of demand measures how sensitive customers are to price changes. It quantifies the percentage change in quantity demanded relative to the percentage change in price, helping teams forecast revenue, margin, and volume impacts before rolling out pricing updates. A rigorous elasticity calculation is essential for categories where small price shifts can drive large changes in demand.
This guide explains the definition, variables, and formulas for elasticity using the midpoint method. It also provides a repeatable workflow for pricing tests, shows how to validate the results, and links to complementary analytics such as retail media incremental ROAS, weighted eCPM across ad inventory, and the A/B test conversion lift calculator.
Definition and measurement scale
Price elasticity of demand is a unitless ratio that compares the percentage change in quantity to the percentage change in price. Because the changes move in opposite directions for most products, elasticity is typically negative. The magnitude signals responsiveness: values greater than 1 in absolute value indicate elastic demand, while values less than 1 indicate inelastic demand.
The midpoint, or arc, method uses averages of the starting and ending price and quantity values. It reduces bias when price moves up or down and is commonly used when you observe two discrete points instead of a continuous curve.
Variables, symbols, and units
Keep prices in the same currency and quantities in the same unit or subscription count. The comparison must use the same time window and customer segment.
- P1 – Initial price, unit: USD per unit.
- P2 – New price, unit: USD per unit.
- Q1 – Initial quantity demanded, unit: units or subscriptions.
- Q2 – New quantity demanded, unit: units or subscriptions.
- E – Price elasticity of demand, unit: unitless ratio.
Core formula with the midpoint method
The midpoint method uses average price and quantity values to calculate percent changes before taking the ratio.
Percent price change = (P2 − P1) ÷ ((P1 + P2) ÷ 2)
Percent quantity change = (Q2 − Q1) ÷ ((Q1 + Q2) ÷ 2)
Elasticity E = Percent quantity change ÷ Percent price change
If E equals −1.30, demand is elastic and a 1% price increase is associated with a 1.3% drop in quantity. If E equals −0.60, demand is inelastic and quantity moves less than price.
Step-by-step calculation workflow
Step 1: Define the test window and segment
Choose a period with stable demand conditions. If your pricing test targets a segment, isolate the sales data to that segment to avoid dilution by other customer cohorts.
Step 2: Record initial price and quantity
Capture the initial price P1 and quantity Q1 in a consistent unit. Ensure you count quantity over the same number of days as the post-change period to avoid a timing bias.
Step 3: Record the new price and quantity
After implementing the price change, collect the new price P2 and quantity Q2. Confirm that promotions, inventory availability, and marketing spend stayed comparable so the quantity shift is primarily tied to price.
Step 4: Calculate elasticity and interpret
Apply the midpoint formula and round to two decimals. Compare the absolute value of E with 1.00 to classify demand as elastic, unit elastic, or inelastic. Report the sign as well to confirm whether demand moved in the expected direction.
Validation checks and diagnostics
Validate that the price change was the primary driver of quantity shifts. Use merchandising notes, promotion calendars, and stock availability to rule out confounding factors. If the item was out of stock or if marketing budgets shifted materially, the elasticity estimate should be treated as directional rather than definitive.
Compare the elasticity result against historical pricing tests or category benchmarks. If the elasticity is positive, demand increased alongside price, which usually indicates a data-quality problem or a premium perception effect that deserves further analysis.
Limits and practical considerations
Elasticity is not constant; it can vary by channel, season, and customer segment. It also depends on competitive pricing and product differentiation. Treat the metric as a point estimate tied to the specific conditions of the test, and rerun it whenever the environment changes.
The midpoint method assumes a linear response between the two price points. For large price moves, consider running multiple tests or using a demand curve model to avoid overgeneralizing from a single pair of observations.
Worked example
A software team increases price from $20.00 to $24.00. Monthly subscriptions fall from 1,000 to 820. The midpoint price is $22.00 and the midpoint quantity is 910. The price change is 18.18% and the quantity change is −19.78%, so elasticity is −1.09. Demand is elastic, implying that the revenue impact must be evaluated carefully before rolling out the price increase to the entire customer base.
Embed: Price elasticity of demand calculator
Use the embedded calculator to compute midpoint elasticity instantly and keep a record of the price and quantity inputs used for your pricing review.