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The price elasticity calculator is used to calculate the price elasticity of demand based on the change in price and demand of a product. It can be used by students, teachers, economists, and finance experts to find the PED for any commodity. Apart from that, it can be used in a very broad spectrum for future decision making. It is a very accurate, robust, and reliable tool that can efficiently calculate PED for you.
In this post, we will explain how to use price elasticity of demand calculator, what is the price elasticity of demand in general, its formulas, how to calculate PED, and its types as well. So, let’s dive into the subject for a great learning curve.
How to use our price elasticity of demand calculator?
You can use our elasticity calculator anytime. It is accessible from anywhere in the world because it is a web-based tool. Manual calculation of price elasticity can be very complicated because the formulas involved in its calculations are complex. Our midpoint method calculator is a perfect tool to save your time while calculating price elasticity of demand.
To use this tool, follow the below steps:
- Enter the initial price in the given input box.
- Enter the final price in the given input box.
- Enter the initial and final quantity in the given input boxes.
- Press the Calculate button to see the results.
It will provide you with the most accurate values when you calculate the price elasticity of demand. It will give you price elasticity of demand, elasticity verdict, initial revenue, final revenue, and the percentage of revenue increased as well.
What is Price Elasticity of Demand?
Price elasticity of demand measures the quantity demanded required to change the price. It is calculated by dividing the percentage change in quantity demanded by the price change percentage. The price elasticity of demand will be:
- Elastic, if greater than 1
- Unit-elastic, if equal to 1
- Inelastic, if less than 1
Price elasticity of demand formula
There are several demand elasticity formulas used to calculate the price elasticity of demand. We will discuss two of the important formulas to calculate the price elasticity of demand.
1. Price Elasticity of Demand
Price elasticity of demand can be calculated by dividing the percentage change in demand by the percentage change in price.
Price Elasticity of Demand = \(\dfrac{\% Change in Q.D}{\% Change in Price}\)
2. Midpoint method for elasticity
In order to calculate elasticity, economists often use the average percentage change both in price and quantity rather than by basic percentage changes. It is regarded as the Midpoint Method for Elasticity.
Midpoint method for elasticity \(=\dfrac{Q2-Q1}{\dfrac{\left(\dfrac{Q2+Q1}{2}\right)}{\dfrac{P2-P1}{\left(\dfrac{P2+P1}{2}\right)}}}\)
In this price elasticity of the demand equation:
Q: refers to the quantity demand of the product, and
P: refers to the price of the product.
The benefit of the midpoint approach is that between two price points, whether there is a rise or a reduction, we have the same elasticity. This is because, in both cases, the formula uses the same structure. In some textbooks, the midpoint method is called the arc elasticity.
3. Using the point elasticity of demand
By using point elasticity of demand, we can calculate the elasticity of demand using the below formula:
One downside of the midpoint method is that the elasticity value loses its importance as both points become more separated. That is why some economists favor the approach of point elasticity. In this process, you must know what the initial values are and what the new values represent.
How to calculate price elasticity of demand?
If you are wondering how to find price elasticity of demand, you are in the right place. In this section, we will explain how to calculate elasticity of demand. Calculating price elasticity of demand can be a tricky task because it involves complex formulas. We will try to keep things simple to calculate PED. Follow the below steps to find the elasticity of demand:
- Identify the values.
- Calculate the percentage change in price.
- Calculate the percentage change in quantity demanded.
- Substitute the values in point-slope formula to calculate price elasticity of demand.
Example:
Let us use an example to demonstrate the price elasticity of demand calculation using a formula.
When the price of wooden tables grown from $20 to $22, the quantity of tables demanded reduced from 100 to 87. What will be the price elasticity of demand for wooden tables?
Solution:
Let’s calculate the price elasticity of demand step by step.
Step 1: Identify and write down the values.
Change in price is $20 to $22
Change in demand is \(100 to 87.\)
Step 2: Calculate the percentage change in price.
Because the price of wooden tables increased from $20 to $22, therefore:
% change in price \(=\dfrac{2}{20} = 0.1 = 10%\)
Step 3: Calculate the percentage change in quantity demanded.
Because the quantity reduces by \(100 to 87\), therefore:
% change in demand \(= \dfrac{13}{100} = - 0.13 = 13%\)
Step 4: Substitute the values in the point-slope elasticity of demand formula to get the PED.
Price Elasticity of Demand = \(\dfrac{\% Change in Q.D}{\% Change in Price}\)
Price Elasticity of Demand \(= \dfrac{13}{-10}\)
Price Elasticity of Demand \(= -1.3\)
Why is the price elasticity of demand important?
The most common indicator of demand elasticity is price elasticity of demand, other variables being demand cross elasticity and demand income elasticity. A company's awareness of price elasticity is essential to determine the prices that maximize its turnover. It tells us if a price increase will lead to revenue increase. It also indicates whether a company can adopt a strategy for price discrimination.
What are the types of price elasticity of demand?
The price elasticity of demand value can be categorized into five types:
1. Perfectly Elastic Demand
A change in price will result in a significant change in demand, sufficient to offset the change in unit price, and thus drive an increase in aggregate revenue for the product. Demand is often elastic when there are close substitutes for a product, and small price changes improve the relative value offered by the product in question.
2. Perfectly Inelastic Demand
Price change has no effect on demand. In the real world, this would be something consumers need to survive or cannot be replaced by any other reasonable means. This has implications for pricing: if the price is lowered, you will see a drop in aggregate revenue without an increase in demand offsetting.
3. Relatively Elastic Demand
Relatively elastic demand refers to demand when the proportionate demand variation is higher than the proportionate price change of the commodity. The relatively elastic demand ranges between one to infinity in numerical value.
4. Relatively Inelastic Demand
Relatively inelastic demand refers to the change in percentage generated by demand is less than the change in the percentage of the product price. The demand would be defined as relatively inelastic if the demand for the product decreases only by 10%, but the price of a commodity rises by 30%. The relatively inelastic demand ranges between zero to one in numerical value.
5. Unitary Elastic Demand
The demand is called unitary elastic demand when there is the same change in the price of the product as the proportionate change in the demand. The unitary elastic demand is equal to one numerical value.
What are the factors that can affect the price elasticity of demand?
A producer's total revenue is equal to the product of the quantity demanded and the price. Change in revenue due to price change depends on the price elasticity of demand for the product. Following are the effect on total revenue under different price elasticity scenarios: if demand is elastic, demand price elasticity is greater than 1 and a one percent increase in price will result in more than one percent change in demand quantity.
- If demand is inelastic, demand price elasticity is lower than 1 and a price increase of one percent will result in less than one percent change in demand quantity.
- If demand is unit-elastic, the price elasticity is equal to 1 and a price increase of one percent will result in exactly one percent change in the quantity demanded.
Why is Price Elasticity of Demand Usually Negative?
Because demand for a product generally increases as the price is lowered and decreases as the price increases. The price change affects the likelihood of consumers using substitute products or taking steps to reduce their aggregate demand. The extent to which this occurs gives us valuable information about the nature of consumer demand.
The price elasticity of demand value can be interpreted into several buckets:
- Elastic Demand: a change in price will result in a significant decrease in demand, sufficient to offset the decrease in unit price, and thus drive an increase in aggregate revenue for the product. Demand is often elastic when there are close substitutes for a product and small price changes improve the relative value offered by the product in question.
- Unitary Elastic: unit demand will increase as prices change, but aggregate revenue will remain constant.
- Inelastic Demand: A price change will result in a decrease in demand but a decrease in overall revenue.
- Perfectly inelastic: price change has no effect on demand. In the real world, this would be something consumers need to survive or cannot be replaced by any other reasonable means. This has implications for pricing: if the price is lowered, you will see a drop in aggregate revenue without an increase in demand offsetting.
- Giffen Goods / Veblen Goods: Special cases where demand for a product increases as prices rise.