It’s not easy trying to find the best price for your products. You have to decide whether to sell more for less. Or would it be better to sell less for more? A price elasticity of demand calculator can help.
This tool uses a midpoint formula to work out the elasticity of demand. Once you know something’s value, you could then use an ‘optimum price calculator’ to work out the best price.
Do you want to know more about calculating price elasticity? Read on.
What Is the Price Elasticity of Demand?
It can be a challenge to explain the price elasticity of demand without an example. Imagine you’re a furniture salesman. You sell 20 lounge suites every month for $1,500. One day, you get a bright idea. What if I cut the price by $200, selling them for $1,300?
From such a decision, you might get more customers. More customers equal an increase in revenue. Let’s see if it would be enough to offset the discount.
This scenario highlights the price elasticity of demand. The change would create a new customer behavior with sales of that discounted sofa. If price elasticity is high, the decrease will cause a massive demand for the product. The salesman’s profits will increase as a result. If the elasticity is low, there might be a slight demand, but not enough to offset revenue loss from the discount.
Price elasticity of demand doesn’t relate to packaging and marketing. This calculator can’t tell you the profitability of selling a gallon of apple juice for $1 or two gallons for $1.50. You would need a price and quantity calculator for such an equation.
What is the Midpoint Formula for Elasticity of Demand?
You use a midpoint formula to determine the elasticity of demand. It’s as follows:
PED = [ (Q₁ - Q₀) / (Q₁ + Q₀) ] / [ (P₁ - P₀) / (P₁ + P₀) ]P₀ = initial product price
P₁ = final product price
Q₀ = initial demand
Q₁ = the demand post-price change
PED = price elasticity of demand
In most situations, the price elasticity of demand is negative. Price and demand are inversely proportionate. As a result, the higher the rate, the lower the demand, and vice versa.
The midpoint formula and calculator can find any values in the equation (P₀, P₁, Q₀ or Q₁). Input your variables into the price elasticity of demand calculator to get an answer.
How do You Calculate Price Elasticity of Demand?
Enjoy this example of price elasticity of demand below.
1. Identify the original price.
Our lounge suite is $1,500.
2. Identify the initial demand.
We sold 20 lounge suites per month.
3. Choose a new price.
We took $200 off, bringing it down to $1,300.
4. Calculate the quantity you sold on the new price.
We sold 30.
5. Use a midpoint formula to calculate the elasticity of demand.
PED = [ (Q₁ - Q₀) / (Q₁ + Q₀) ] / [ (P₁ - P₀) / (P₁ + P₀) ]
PED = [ (30 - 20) / (30 + 20) ] / [ (1,300 – 1,500) / (1,300 + 1,500) ]
PED = [ 10 / 50 ] / [ -200 / 2,800 ]
PED = (10 x 2,800) / (-200 x 50)
PED = 28,000 / -10,000 = -2.8
6. The price elasticity of demand is -2.8. You can work this problem out by hand or with the calculator.
Revenue Increase and Price Elasticity of Demand
There is also an equation for calculating revenue of initial and final states. It is as follows:
R = P x QThe revenue increase uses this formula:ΔR = R₁ - R₀ = P₁ x Q₁ - P₀ x Q₀
When you see a negative revenue increase, it means the revenue is dropping. Price elasticity demand relates to a revenue increase. A few rules apply in the calculation process.
1. PED is inelastic (at zero) = a price change doesn’t affect demand (e.g., survival goods).
2. PED is inelastic (at -1 < PED < 0) = a price drop causes a demand increase, but revenue decreases.
3. PED is unitary elastic (at PED = -1) = price decrease is proportionate to demand increase. The revenue doesn’t change.
4. PED is elastic (at -∞ < PED < -1) = price decrease causes massive demand and revenue increase.
5. PED is perfectly elastic (PED = -∞) = any price increase causes the price to drop to zero (e.g., $1 being worth $1).