Price elasticity of demand (PED) measures how much demand for a product changes when its price changes. You divide the percentage change in quantity demanded by the percentage change in price: a result above 1 means demand is elastic (price-sensitive), and below 1 means it's inelastic.
Shopify gives the formula as PED = percentage change in quantity divided by percentage change in price. Because price and quantity move in opposite directions, OpenStax notes the raw answer is always negative, so it's usually reported as an absolute value. Corporate Finance Institute (CFI) does the same, because what you care about is the size of the number, not its sign.
How to read the number
| PED | Name | What it means |
|---|---|---|
| Above 1 | Relatively elastic | Demand moves more than price |
| Exactly 1 | Unit elastic | Demand moves by the same proportion as price |
| Below 1 | Relatively inelastic | Demand moves less than price |
| Perfectly elastic or perfectly inelastic | Theoretical end points | Shopify says these exist in theory rather than in real markets |
CFI gives two quick contrasts. A good whose price rises 10% while demand falls 30% is elastic. A good whose price rises 30% while demand falls only 10% is inelastic.
Three worked examples
| Example | Price change | Quantity change | PED | Reading |
|---|---|---|---|---|
| Shopify accounting software | $15 to $18 (+20%) | 2.0 million to 1.9 million users (-5%) | 0.25 | Inelastic |
| CFI handbag | $500 to $550 | 300 to 200 | 4.2 | Elastic |
| Shopify running shoes | +15% | -15% | 1 | Unit elastic |
All three use the sources' US dollar figures, as of October 2026. In Shopify's software example, a monthly subscription goes from $15 to $18, a 20% rise. Users fall from about two million to 1.9 million, a 5% drop. So PED is 0.05 divided by 0.2, which is 0.25. A 20% price rise cost only 5% of the users, which is what inelastic looks like.
In Shopify's running shoe example, a $120 pair goes up 15% and demand falls by exactly 15%. That's unit elastic: a PED of 1.
The catch: the simple formula changes its answer with direction
Most people work out percentage change using the old price and old quantity as the starting point. CFI says that isn't ideal, because the direction of the change affects the result. Its example is a pair of pants that drops from $30 to $20, with demand rising from 100 to 150 pairs.
CFI's article doesn't print the sums in its text, so here's my working on its numbers. Using the old values, quantity rises by 50 on a base of 100, which is 0.5, and price falls by 10 on a base of 30, about 0.33. That gives a PED of about 1.5. Now run the same change in reverse, with price going from $20 to $30 and demand falling from 150 to 100. Quantity falls by 50 on a base of 150, about 0.33, and price rises by 10 on a base of 20, which is 0.5. The PED is now about 0.67. Same two points, two different answers: one elastic, one inelastic.
CFI's fix is the midpoint method, which uses the average quantity and the average price as the bases. My working: the average quantity is 125 and the average price is $25, so quantity changes by 50 over 125 (0.4) and price by 10 over 25 (0.4). The PED is 1 in both directions.
The same method gives CFI's handbag figure. Quantity falls by 100 on an average of 250, which is 0.4. Price rises by 50 on an average of 525, about 0.0952. Divide one by the other and you get 4.2, matching CFI's answer (the working is mine).
What makes demand elastic or inelastic
The big driver is how easily your buyer can do without it, or switch. CFI says elastic goods tend to be non-essentials with plenty of substitutes, such as restaurant meals or fashion. Inelastic goods tend to be essentials without substitutes, such as water or medication.
Shopify's examples line up the same way. Down pillows are elastic because they're easy to live without. A patented life-saving medicine is inelastic. Canned sparkling water is elastic because buyers simply switch brands. Shopify also says that if you hold a big share of the market or make something essential, customers may keep buying after a price rise, while with lots of substitutes even a small change can make demand plunge or surge.
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How to estimate PED for your own product
- Record the old and new price.
- Record the old and new quantity sold over the same length of time.
- Work out the percentage change in each, using the midpoint method so direction doesn't skew it.
- Divide the change in quantity by the change in price, and drop the minus sign.
- Read it: above 1 is elastic, below 1 is inelastic.
PED is one input to a wider decision. For the rest of it, read this guide to building a pricing strategy for your products, which walks through each stage, and it's worth being clear on markup vs margin before you move any number.
Where I come in
Elasticity isn't fixed by the product alone. It's also shaped by how clearly a buyer sees why yours is different, because a buyer who can't tell you apart from a rival will treat you as a substitute. That's the side I work on. With 23 years in marketing behind me, I help small businesses and SaaS marketing teams position an offer so buyers compare it on value, not only on the number. You can see how I work on my work with me page.
My verdict
Ask one question first: how easily could your buyer say no, or buy something else instead? Only then change a price. If the honest answer is very easily, expect demand to move a lot. And don't trust a single calculation. Test a change on a small group first, use the midpoint method when you work out the result, and look at the number alongside what your customers tell you.
Frequently asked questions
What is the formula for price elasticity of demand?
PED equals the percentage change in quantity demanded divided by the percentage change in price, usually reported as a positive number.
What does a price elasticity of demand above 1 mean?
Demand is elastic: it changes by a bigger proportion than the price did, so buyers are price-sensitive.
What is an example of inelastic demand?
In Shopify's example, accounting software going from $15 to $18 a month lost only 5% of users, a PED of 0.25.
Why use the midpoint method?
CFI says the simple method gives a different answer depending on whether price goes up or down. Using average price and quantity as the bases fixes that.
Why is price elasticity of demand negative?
Price and quantity demanded move in opposite directions, so OpenStax says the raw figure is negative and it's usually shown as an absolute value.
