Price Elasticity of Demand Calculator

Price Elasticity of Demand Calculator

This price elasticity of demand calculator helps to assess how changes in product pricing impact customer demand by calculating its PED value and revenue. By providing initial and final revenue, as well as the revenue increase percentage helps to decide whether you should raise the price and sell less, or lower the cost and sell more.

What Is Price Elasticity Of Demand?

Price elasticity of demand (PED) is a ratio used in economics to measure how much the quantity demanded of a product is impacted by a change in its price. It helps to understand how consumer’s buying behavior changes due to price adjustments.

Price Elasticity of Demand Formula: 

PED = Percentage Change In Quantity (∆Q/Q) Percentage Change In Price (∆P/P)

The formula can be further represented as an equation:

PED = Q1 - Q0 (Q1 + Q0) ÷ 2 ÷ P1 - P0 (P1 + P0) ÷ 2

Where:

• P0 represents the initial price
• P1 is the final price
• Q0 is the initial quantity 
• Q0 indicates the final quantity
• PED is the price elasticity of demand

When it comes to manual calculation, consider the formula, and the PED calculator is the best option for making direct PED calculations. 

How To Calculate the Price Elasticity of Demand?

Step #1: Product Details

Find data on price and quantity demanded from various sources like historical records, market research, etc.

Step #2: Calculate Percentage Changes

Determine the percentage change in price and quantity.

Step #3: Add Values In The Formula

Insert the values in the formula to get the PED value.

Step #4: Interpret The Result of Price Elasticity of Demand (PED)

• Elastic Demand (PED > 1): It represents a high response to the price change. A little increase in the price of the product can cause a significant decrease in the demand for the product and vice versa
• Inelastic Demand (PED < 1): It indicates that the consumers are less responsive to the change in price. Meanwhile, a small increase in the price does not bring a significant decrease in the demand for the product
• Unitary Elastic Demand (PED = 1): The increase in the price is equal to the change in the demand. (This case is very rare) 
• Perfectly Inelastic Demand (PED = 0): It means the change in the price does not impact the quantity demanded. (This case is very unlikely to occur)
• Perfectly Elastic Demand (PED = Infinite): A small price change can cause an infinite change in the demand for the product. (Extremely rare)

Solved Example: 

Let's suppose you run a bakery. Currently, you sell cupcakes for $5.00 each and you sell 100 cupcakes per day. Now you increase the price to $5.50. After raising the price, you sell only 80 cupcakes. Find the price elasticity of demand, initial revenue, final revenue, and revenue increase percentage.

Solution: 

Calculate the percentage change in price:

= New Price - Old Price Old Pricex 100%

= $5.50 - $5 $5x 100% = 25% increase

Percentage change in quantity demanded:

= New Quantity Demanded - Old Quantity Demanded Old Quantity Demanded x 100%

= 80 - 100 100x 100% = 20% decrease in quantity demanded

Calculate price elasticity of demand:

By putting values in the formula:

PED = - 20% 25%x 100% = - 0.8%

PED Result Interpretation:

Since the PED value is lower than 1, the demand for the cupcakes is elastic. It indicates that a small price change has brought a large change in the demand for cupcakes. 

Initial Revenue:

Initial Revenue = Initial Price x Initial Quantity Demanded

Initial Revenue = $5.00 x 100 = $500.00/day

Final Revenue:

Final Revenue = Final Price x Final Quantity Demanded

Initial Revenue = 5.50 x 80 = $440/day

Revenue Increase:

Revenue Change = New revenue - old revenue

Revenue change = 440 - 500 = - 60

Revenue Change Percnetage = Revenue Change Old RevenueX 100

Revenue Change Percnetage = - 60 500X 100

Revenue Change Percentage = - 12%

This example demonstrates how to calculate the price elasticity of demand for a single product. It helps you understand the relationship between price changes and sales. Our price elasticity of demand calculator also lets you make frequent PED calculations for your product regarding how its price impacts buyer behavior.

FAQ's:

What Is A Good Price Elasticity?

There is not a universally good price elasticity value. The PED value depends upon the business goals and the type of product that you sell. To achieve your specific objectives ( maximizing sales, increasing the profit, etc) you need to find the optimal PED ratio. 

What Factors Affect Price Elasticity of Demand?

• Number of Substitutes Available
• Nature of Commodity
• Price of Product Concerning Income
• Brand Loyalty
• Necessary Goods
• Level of Price
• Postponement of Consumption
• Number of Uses
• Share In Total Expenditure
• Time Period
• Habits

What Are 5 Examples of Inelastic Products?

The five common examples of inelastic products include:

• Salt 
• Prescription drugs
• Cigarettes
• Electricity
• Public Water Supply

How Do You Know If Demand Is Elastic or Inelastic?

When the change in demand is large in the opposite direction because of the change in the price of the product then the demand is elastic. On the other hand, if the change in quantity demanded is small when the price changes then the demand is inelastic. 

Why Is PED Usually Negative?

The price elasticity of demand (PED) is usually negative because it reflects the law of demand. This law states “There is an inverse relationship between the price and the quantity demanded of the product/service”

Why Is It Important To Calculate The Price Elasticity of Demand?

• Helps to set the optimal price for products
• Tells how much the consumer’s buying behavior changes because of price adjustments
• Analyzes the price sensitivity of a product

References:

From the sources of Wikipedia: Price elasticity of demand (PED).

From the sources of investopedia.com: Price Elasticity of Demand: Meaning, Types, and Factors.

From the source of economicsdiscussion.net - 5 Types of Price Elasticity of Demand.