Price elasticity of demand measures how strongly the quantity you sell responds to a change in your price. If a 10% price increase costs you 13% of your unit sales, demand is elastic; if it costs you 4%, demand is inelastic. For a small business the number is not a textbook constant but a summary of your own price test: two prices, two sales volumes, the same kind of period. It tells you which way revenue moved, and, together with your variable cost, whether the change paid off.
The midpoint formula
Elasticity = [(Q2 − Q1) ÷ ((Q2 + Q1) ÷ 2)] ÷ [(P2 − P1) ÷ ((P2 + P1) ÷ 2)], reported as an absolute value
Example: a product sold 500 units a month at $20. At $22 it sold 440. The quantity change is −60 ÷ 470 = −12.8%, the price change is 2 ÷ 21 = +9.5%, and the elasticity is 12.8 ÷ 9.5 = 1.34. Price and quantity moved in opposite directions, as expected, so the negative sign is dropped. Above 1 the demand is elastic: quantity reacted more than price. Below 1 it is inelastic, and exactly 1 is unitary.
Why the midpoint
Simple percentage changes depend on which price you start from. From $20 to $22 they give −12% ÷ +10% = 1.20. Going back from $22 to $20 they give +13.6% ÷ −9.1% = 1.50 — a different answer for the same two observations. The midpoint method divides by the average of the two values, so it returns 1.34 in both directions. That symmetry matters when you compare a price increase in one month with a decrease in another.
Revenue is not profit
| At $20 | At $22 | Change | |
|---|---|---|---|
| Units sold | 500 | 440 | −12.8% (midpoint) |
| Revenue | $10,000 | $9,680 | −$320 |
| Contribution per unit | $8 | $10 | +$2 |
| Total contribution | $4,000 | $4,400 | +$400 |
With elastic demand a price increase lowers revenue, and here revenue does fall by $320. But each remaining unit now contributes $10 instead of $8, so total contribution rises by $400 — and fewer units also mean less material and packaging to buy. The economic rule about revenue is correct; it simply is not the question a business with variable costs needs to answer. The break-even question is how much volume you can lose before contribution falls, and that depends on your margin as much as on elasticity.
Running your own test
-
Change one thing
Move only the price; keep promotion, listing position and stock levels as steady as you can.
-
Compare like periods
Use equal lengths of time and avoid comparing a holiday month with a quiet one.
-
Check the direction
If price and sales both rose, something besides price changed; the result is not an elasticity.
-
Judge on contribution
Multiply each volume by price minus variable cost and compare the totals, not the revenue.
An elasticity from two observations describes that price range only. It can differ at a much higher or lower price, for another product, or in another season, and there are no reliable "typical" values to borrow for a single small business — your own data is the only source that fits.
Method references: OpenStax: Price Elasticity of Demand; OpenStax: Elasticity and Pricing. Checked October 26, 2026. The price test is hypothetical.
Related calculators & guides
Report an error
Thank you! Your feedback helps us make this page better.
Could not send. Please try again.