Calculating Price Elasticity of Demand Now the question becomes how to determine the percentage change in quantity demanded and the percentage change in price. While it may sound complex, the formula is fairly simple. Let’s say we are trying to calculate the price elasticity of demand for bread. Let’s also say that the price of bread was $1.50 in April, and 500 loaves of bread were purchased at a store. In May, the price of bread has increased to $2.00 per loaf, and 200 loaves of bread were purchased. This is all the information we need. Below is a step-by-step process for calculating the price elasticity of demand for bread.
Quantity in May 200 Q Quantity in April 500 Q´
It does not matter if you label the earlier or later price/quantity with the “prime symbol” (´). You will want to make sure, though, that your labels are consistent. In other words, here the price in April was labeled as P´ (P prime). That would mean the quantity in April would need to be labeled as Q´ (Q prime). Our calculations would be thrown off if we used the prime symbol (´) for the price in April and the prime symbol for the quantity in May. Making sure you stay consistent is key here. Step 2 The next step is to calculate the following using the prices we were given:
(P + P´) =
($2.00 + $1.50) =
$3.50 = 1.75
2 2 2 Step 3 Now, calculate the following using the quantities:
(Q + Q´) =
(200 + 500) =
700 = 350
2 2 2 Step 4 The next step is to calculate the change in price.
P – P´ = $2.00 – $1.50 = $0.50 Step 5 Next, we will calculate the change in quantity.
Q – Q´ = 200 – 500 = – 300 Step 6 Divide the result in Step 2 by the result in Step 3.
Step 2 Result
= 0.005 Step 3 Result
Step 7 Divide the result in Step 5 by the result in Step 4.
Step 5 Result
= – 300
= – 600 Step 4 Result