What is Price Elasticity of Demand?
Price elasticity of demand measures how responsive quantity demanded is to price changes. It helps businesses set optimal prices, forecast sales, and understand market dynamics. By calculating elasticity, companies can determine if price changes will significantly affect demand, helping in making informed pricing decisions and maximizing revenue.
Elasticity Calculator
Elasticity Formula
Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)
Where:
% Change in Quantity = [(New Qty - Initial Qty)/Initial Qty] × 100
% Change in Price = [(New Price - Initial Price)/Initial Price] × 100
Calculation Process
- Calculate percentage change in quantity demanded
- Calculate percentage change in price
- Divide percentage quantity change by percentage price change
- Interpret result using elasticity scale
Elasticity Values Table
| Value Range | Elasticity Type | Description |
|---|---|---|
| PED > 1 | Elastic | Demand changes more than price |
| PED = 1 | Unitary | Demand changes equal to price |
| PED < 1 | Inelastic | Demand changes less than price |
Frequently Asked Questions
1. What does negative price elasticity mean?
Negative price elasticity indicates normal economic behavior where price and quantity demanded move in opposite directions. The negative sign is typically ignored in interpretation as we focus on absolute value.
2. How is elasticity used in pricing strategy?
Businesses use elasticity to determine optimal pricing. Inelastic goods can sustain price increases, while elastic goods may require competitive pricing. Understanding elasticity helps maximize revenue and market share.