Price elasticity of demand (PED) is a measure of the responsiveness of demand for a product after a change in that product’s price. It is calculated with the following formula: PED = %change in quantity demanded of good x/%change in price of good x. A good is said to have price inelastic demand when a change in price results in a less than proportional change in quantity. A good is said to have price elastic demand when a change in price results in a more than proportional change in quantity.
The relationship between price elasticity of demand and firms’ total revenue stems from this idea: for a price inelastic good, when a firm increases the good’s price, demand decreases but at a slower rate than the price increase so a firm can increase revenue through a price increase of the good. However, for a price elastic good when a firm increases the good’s price, demand decreases at a faster rate than the price increase so a firm decreases its revenue through a price increase of the good.