When demand is elastic, buyers are price-sensitive: raise the price even a little and they back off in large numbers, so the percentage drop in quantity demanded is bigger than the percentage rise in price. When demand is inelastic, buyers keep buying regardless: raise the price and quantity barely moves, so the percentage drop in quantity is smaller than the percentage rise in price. That one difference — which percentage is bigger — is the entire distinction.

Which one is my exam question about? Ask three quick questions about the good. Does it have close substitutes — other brands, other products that do the same job? If yes, demand tends to be elastic, because buyers can switch. Is it a necessity — something people buy no matter what, like medicine or gasoline to get to work? If yes, demand tends to be inelastic. Does spending on it take up a large share of the buyer's budget? A big budget share means buyers notice price changes and react more strongly, pushing demand toward elastic.

For the full formal definition and the derivation of price elasticity of demand, see the price elasticity of demand glossary page. To see how elasticity shapes the slope of the demand curve and how supply and demand interact, visit the supply and demand model.

Both elastic and inelastic demand describe how strongly buyers respond to a price change — the difference is whether that response is large or small relative to the price move itself.

The price elasticity of demand (PED) is the percentage change in quantity demanded divided by the percentage change in price. Because demand curves slope downward, a price rise produces a quantity fall, so PED is always a negative number. You compare its magnitude — the absolute value $|PED|$ — to 1. When $|PED| > 1$, demand is elastic; when $|PED| < 1$, demand is inelastic; when $|PED| = 1$, demand is unit elastic, meaning the percentage changes are exactly equal and total revenue does not change when the price moves.

For the full formal definition and derivation, see the price elasticity of demand glossary page. If you want a refresher on why quantity demanded falls when price rises in the first place, start with the demand glossary entry.

The table below covers every dimension an exam question is likely to test. Read it once, then return to it when a specific number or concept needs pinning down.

Price elasticity of demand — defined as the percentage change in quantity demanded divided by the percentage change in price — is built entirely around percentages, not the raw size of the change. A $1 price rise on a$2 item is a 50% change; the same $1 rise on a$100 item is 1%. Elasticity tells you whether buyers' quantity reaction outruns that percentage change in price (elastic, $|PED| > 1$) or lags behind it (inelastic, $|PED| < 1$).

This percentage logic is exactly why the revenue effects run in opposite directions. When demand is elastic, the quantity reaction is proportionally larger than the price change, so the revenue lost from fewer units sold exceeds the revenue gained from the higher price — total revenue falls. When demand is inelastic, the quantity reaction is proportionally smaller, so the revenue gained from the higher price exceeds what is lost from the modest drop in volume — total revenue rises. The unit-elastic case ($|PED| = 1$) sits at the exact crossover point where the two forces cancel out and revenue stays unchanged.

Take a single price change — a $+25\%$ rise — and apply it to two goods: gasoline and restaurant burgers. The price move is identical. The revenue outcome is opposite. That contrast is not a coincidence; it is the entire concept of elasticity made visible.

Both goods start at P = \4$and$Q = 100$units, giving the same baseline total revenue of$$400$. For gasoline, the price rises from$$4$to$$5$.

Because drivers have few short-run alternatives, quantity demanded falls only slightly — from 100 gallons to 95 gallons.

The PED magnitude is the ratio of the two percentage changes. A 5% quantity drop in response to a 25% price rise gives a ratio well below 1 — the definition of inelastic demand.

Total revenue moves with the price rise: 100 \times \4 = $400$before,$95 \times $5 = $475$ after. Revenue went up when price rose. That upward movement in revenue is the inelastic signature.

Now apply the same $+25\%$ price change to restaurant burgers, starting from the same P = \4$,$Q = 100$ baseline.

Burgers have many substitutes — other restaurants, home cooking, different fast-food options. A 25% price rise drives quantity demanded down sharply, from 100 burgers to 60 burgers.

The PED magnitude is now greater than 1: the quantity response is proportionally larger than the price change, which is what elastic means.

Total revenue falls: 100 \times \4 = $400$before,$60 \times $5 = $300$ after. Revenue went down when price rose. That is the elastic signature — the quantity loss more than offsets the higher price per unit.

These calculations use the simple percentage method — dividing the change by the original value. Exam boards (particularly AP and IB) sometimes require the midpoint method, which divides by the average of the two values instead; the elastic/inelastic labels come out the same for these numbers. See the price elasticity of demand glossary page for the midpoint formula.

To see the total-revenue effect in motion, open the supply and demand model and drag the demand curve — watch how the revenue rectangle changes shape as the curve steepens or flattens. For the complete definition, derivation, and determinants of elasticity, visit the price elasticity of demand glossary page.