Supply and demand explains the basic principles of pricing. As the supply of goods and services grows, the price lowers. Elasticity is a concept economists use to explain how a change in one variable affects others, for example, how a change in price affects demand. Price elasticity of demand, or PED describes changes in demand for a good relative to a change in price and is defined as the percentage change in demand divided by the percentage change in price. A good or service is "inelastic" if the percentage change in demand is less than the percentage change in price, or "elastic" if the other way around.
Calculate the percentage change in demand after a price change. For example, if the quantity of goods demanded drops from 1,000 to 900, then the percentage change in demand is minus 10 percent. You subtract 900 from 1,000 to get 100, which is 10 percent of the original amount of 1,000.
Figure the percentage change in price. To continue the example, if the price of the goods rose from $20 to $25 per unit, the percentage change in price is 25 percent.
Divide the percentage change in demand by the percentage change in price. In the example, -10 percent divided by 25 percent is - 0.4. The PED of this exemplar product is -0.4. Because percentage demand for the product is less than percentage change in price, demand for this particular product is considered inelastic.
