Price elasticity

Price elasticity of demand measures how sensitive customer demand is to a change in price. A product is "elastic" when a small price change causes a large change in quantity sold, and "inelastic" when demand barely moves even as price changes — a distinction that determines whether raising or lowering price will grow or shrink total revenue.

It is calculated as % change in quantity demanded ÷ % change in price. A result with a magnitude greater than 1 indicates elastic demand (revenue tends to move opposite to price direction), while a magnitude below 1 indicates inelastic demand (revenue tends to move with price direction). Estimating it reliably requires isolating the effect of price from other factors moving at the same time — seasonality, promotions, competitor pricing — which is why it is often estimated through controlled price tests or regression models rather than read directly off historical sales.

Price elasticity matters because it underlies dynamic pricing and markdown optimization decisions: discounting an inelastic product mostly gives away margin on sales that would have happened anyway, while discounting an elastic one can meaningfully grow volume and revenue. A common pitfall is assuming elasticity is constant — it typically varies by price level, customer segment, and time (elasticity around a holiday can differ sharply from an ordinary week), so a single historical estimate can go stale.