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Price Elasticity of Demand

Price elasticity of demand shows how demand changes when the price of a product or service changes.

  • Elastic demand — when the price decreases, demand grows more rapidly. This is typical of products with many substitutes.

  • Inelastic demand — demand barely responds to price changes. Examples include medicines and essential goods.

Unit elasticity means that demand and price change proportionally.

The elasticity coefficient is calculated using the formula: (% change in demand) ÷ (% change in price).

For example, if the price increases by 10% and demand falls by 20%, the coefficient equals two, meaning that demand is elastic.

Why Calculate Price Elasticity of Demand

Price elasticity indicates how pricing affects revenue. A price reduction pays off only when the increase in sales outweighs the discount. In marketing, it serves as a guide when planning promotions and special offers. In B2B, high elasticity signals that customers are price-sensitive and that additional arguments demonstrating value are needed.

Learn marketing terms in the glossary, then put theory into practice with Umnico — a platform for managing customer communications

Learn marketing terms in the glossary, then put theory into practice with Umnico — a platform for managing customer communications

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