Price Elasticity of Demand Calculator
Calculate price elasticity of demand (PED) to understand how sensitive your customers are to price changes and how price adjustments affect revenue. This calculator helps optimize pricing strategy.
Price & Quantity Data
Price Elasticity Results
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New Revenue:
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Business Insights
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Understanding Price Elasticity of Demand
Price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to a change in its price. It helps businesses understand customer sensitivity to price changes and optimize pricing strategies.
What is Price Elasticity of Demand?
Definition
- Measures demand sensitivity to price changes
- Percentage change in quantity demanded
- Divided by percentage change in price
- Key metric for pricing strategy
Formula
- PED = (% Change in Quantity Demanded) ÷ (% Change in Price)
- Can be calculated using midpoint formula
- Absolute value indicates elasticity magnitude
- Sign indicates direction of relationship
Types of Price Elasticity
Demand Elasticity Categories
How demand responds to price changes
Elastic Demand (PED > 1):
- Quantity changes more than price
- Consumers are price sensitive
- Lower prices increase total revenue
- Many substitutes available
Inelastic Demand (PED < 1):
- Quantity changes less than price
- Consumers are price insensitive
- Higher prices increase total revenue
- Few substitutes available
Unit Elastic (PED = 1):
- Quantity and price change equally
- Revenue remains constant
- Balanced price sensitivity
- Rare in practice
Perfectly Elastic (PED = 8):
- Infinite quantity response
- Horizontal demand curve
- Perfect substitutes
- Theoretical concept
Factors Affecting Price Elasticity
Product Characteristics:
- Availability of substitutes
- Necessity vs luxury goods
- Proportion of budget spent
- Time horizon for adjustment
Market Factors:
- Number of competitors
- Brand loyalty
- Switching costs
- Information availability
Revenue Optimization
| Elasticity Range | Price Change Impact | Revenue Strategy | Business Examples |
|---|---|---|---|
| PED > 1 (Elastic) | Price ? ? Revenue ? | Lower prices to increase sales | Consumer electronics, clothing |
| PED < 1 (Inelastic) | Price ? ? Revenue ? | Raise prices to increase revenue | Gasoline, cigarettes, insulin |
| PED = 1 (Unit) | Revenue unchanged | Price changes don't affect revenue | Rare in practice |
Cross-Price Elasticity
Substitute Goods:
- Positive cross-elasticity
- Price increase in one raises demand for other
- Coca-Cola and Pepsi
- Competition analysis
Complementary Goods:
- Negative cross-elasticity
- Price increase reduces demand for complement
- Cars and gasoline
- Product bundling
Income Elasticity
Normal Goods:
- Positive income elasticity
- Demand increases with income
- Luxury goods have high elasticity
- Necessities have low elasticity
Inferior Goods:
- Negative income elasticity
- Demand decreases with income
- Generic brands
- Public transportation
Practical Applications
Pricing Strategy:
- Dynamic pricing
- Promotional pricing
- Price discrimination
- Loss leader strategy
Market Analysis:
- Competitor analysis
- Market share analysis
- Customer segmentation
- Demand forecasting
Key Takeaways for Price Elasticity
- Price elasticity of demand measures how quantity demanded responds to price changes
- Elastic demand (PED > 1) means consumers are price sensitive and lower prices increase revenue
- Inelastic demand (PED < 1) means consumers are price insensitive and higher prices increase revenue
- Elasticity depends on availability of substitutes, necessity of the good, and budget proportion
- Understanding elasticity helps optimize pricing strategy and maximize revenue
- Cross-price elasticity shows relationships between substitute and complementary goods
- Income elasticity indicates how demand responds to income changes
- Regular elasticity analysis helps businesses adapt to market conditions