The price elasticity of demand is the measure of change in a product’s demand when its price is changed (increased or decreased). In essence, it is the change in a product’s demand when nothing (including externalities) but its price changes.
It shows the percentage change in a good’s demand in relation to one percentage change in its price. This change in the product’s demand due to cost can be calculated with our price elasticity of demand calculator.
Let’s suppose that you run a shop to sell air conditioners. Every month, you sell 350 AC units for $900 each. Then, one day you start wondering, “Hey! What if I start selling my Ac units for $800 rather than $900 would it increase my customer base and revenue despite a decrease in price?”
This thought of yours would be termed as the price elasticity of demand, it describes the behavior of potential customers when you change your product’s price.
To put it simply,
If the elasticity gets high, a decrease in price would cause an out of proportion increase in demand. This would make it profitable to decrease the price. Such situations are typically related with luxury goods, such as collectibles or novelty items.
If on the other hand, the elasticity gets low, a decrease in price will cause a minor increase in demand. In such scenarios, the demand increase will be inadequate when it comes to revenue. Everyday necessary products, such as car fuel or pharmaceutical products show this behavior.
However, demand’s price elasticity is not related to different packaging techniques. It surely wouldn’t show you whether it's more profitable to sell 0.6-liter bottle of water for $0.60 or 1.6-liter bottle for $1.3.
The ecalculator Price elasticity calculator employs the midpoint formula for demand elasticity which can also be referred to as the Price elasticity of demand formula.
Our calculator can also be used by retailers and whole sellers who want to establish the most optimum price for their products.
With this tool, you’d be able to decide whether you should charge more money for your goods but sell a smaller quantity or if you should decrease the cost, but pump up the demand.
Elasticity of demand can be determined with the use of the midpoint formula:
PED = (Q₁ - Q₀) / (Q₁ + Q₀) / (P₁ - P₀) / (P₁ + P₀)
Where:
P₀ is the early price of the given product;
P₁ is the closing price of the given product;
Q₀ is the early demand;
Q₁ is the demand after the change in price;
PED is the price elasticity of demand.
Demand’s elasticity is usually always negative. It means that the correlation between the demand and price is inversely proportional as in, the lower the demand, higher the price.
You can also employ this Elasticity calculator to determine any of the values in the formula (P₀, P₁, Q₀ or Q₁). All you have to do is put in the remaining variables in the tool and it will automatically calculate the result.
In order to know how to calculate elasticity of demand, let's evaluate the example of an Air Conditioner store.
Start by noting down the current price of an air conditioner unit. Let’s suppose it is worth $900.
Then, determine the demand of Ac units with the current price. In the case for this store, suppose it was equal to 350 units per month.
Decide the new price for your AC units. Let’s suppose you decided it should be $800.
Now, measure the units sold at the new price. Consider that you managed to sell 400 units for this decreased price.
Now, how to find price elasticity of demand?
Use the demand elasticity formula:
PED = [(Q₁ - Q₀) / (Q₁ + Q₀)] / [(P₁ - P₀) / (P₁ + P₀)]
PED = [(400 - 350) / (400 + 350)] / [(800 - 900) / (800 + 900)]
PED = [50 / 750] / [-100 / 1700]
PED = (50 * 1700) / (-100 * 750)
PED = 85,000 / -75,000 = -1.13
As you can see, the price elasticity of demand manually has been calculated using price elasticity of demand equation to be -1.13. However, calculating it with price elasticity of demand calculator would be lightning quick, eliminating margin for human error.
Also, while you’re here, you can check out other tools at ecalculator that you might find relevant as well especially if you’re a businessman or an economist. You can check out GST Calculator, Sales Tax Calculator, Inflation Calculator and Stock Calculator.