Price Elasticity of Demand: How Price Changes Affect Sales and Revenue
October 29, 2026
Price elasticity of demand measures how sensitive the quantity sold is to a change in price. It is the percentage change in quantity divided by the percentage change in price. If a price rises 10% and sales fall 8%, the elasticity is −8% ÷ 10% = −0.8. Because demand typically falls when price rises, the result is negative, and people often quote the absolute value.
The magnitude matters. If it is below 1 (inelastic), a price increase raises revenue because the quantity falls proportionally less than the price rises. If it is above 1 (elastic), a price increase lowers revenue.
Skip the math and get your answer instantly:
Open the Margin & Markup Calculator →Worked Example
A product sells 1,000 units a month at $10 for revenue of $10,000. After raising the price to $11 (+10%), it sells 920 units (−8%): elasticity −0.8, inelastic, and revenue becomes 920 × $11 = $10,120. After instead raising the price to $12 (+20%), it sells 750 units (−25%): elasticity −1.25, elastic, and revenue becomes $9,000. The midpoint (arc) method, which uses average values in the denominators, gives −0.875 for the first change: (−80 ÷ 960) ÷ (1 ÷ 10.5) = −0.0833 ÷ 0.0952, and is preferred for large changes because it gives the same answer in both directions.
Revenue is not the same as profit. If each unit costs $6 to make, profit at $10 is 1,000 × $4 = $4,000; at $11 it is 920 × $5 = $4,600; at $12 it is 750 × $6 = $4,500. The highest profit is at $11 in this example.
| Price | Units sold | Revenue | Profit (cost $6) |
|---|---|---|---|
| $10 | 1,000 | $10,000 | $4,000 |
| $11 | 920 | $10,120 | $4,600 |
| $12 | 750 | $9,000 | $4,500 |
What Determines Elasticity
Demand tends to be less elastic when there are few substitutes, when the product is a necessity, when it is a small share of the budget, when the buyer has little time to switch, and when the product is differentiated by brand. It is more elastic for luxuries, commodities with many competitors, and big-ticket purchases. Elasticity also differs by segment and by time: gasoline demand is quite inelastic in the short term but more elastic over years as people change vehicles.
Using Elasticity in Pricing
For a business with a unit cost c and price p, the profit-maximizing markup follows the rule (p − c) ÷ p = 1 ÷ |elasticity|. With an elasticity of −2 the margin should be 50%; with −4, 25%. This shows why products with few substitutes support higher margins. Test prices with controlled experiments instead of relying on a guess, because estimates from past data may be distorted by promotions, seasons, and competitor actions.
Limits of the Estimate
Elasticity is not constant: it typically changes along the demand curve. A small change from a current price is more reliable than extrapolating to a very different price. Other factors changing at the same time, such as advertising, can confuse the estimate. Look at the cross-elasticity too (how a competitor's price affects your sales) and consider long-term effects on brand and customer relationships when raising prices.
Frequently Asked Questions
How is price elasticity calculated?
The percentage change in quantity divided by the percentage change in price.
What does inelastic demand mean?
Quantity changes proportionally less than price, so the absolute elasticity is below 1.
Does raising price always raise revenue?
Only when demand is inelastic.
Is maximum revenue the same as maximum profit?
No. Costs matter, and profit is often maximized at a higher price.
What makes demand inelastic?
Few substitutes, necessities, and small share of the budget.