Price elasticity of demand or PED measures the responsiveness of consumers when the price of a product changes. The responsiveness of customers to a change in a product’s price is the extent to which they change their demand for that product.
When the customers are more responsive, they either decrease or increase their demand for the product by a higher degree of response to a smaller increase or decrease in the price of the product. Using this price elasticity of demand calculator, you can easily acquire the values you need to assess the responsiveness of your consumers.
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How to use the price elasticity of demand calculator?
This elasticity calculator is simple and easy to use making it a convenient tool for companies and businesses. To generate the values you need, follow these simple steps:
- First, input the initial price which is a monetary value.
- Then input the initial quantity of your product.
- The next thing to input is the final price which is also a monetary value.
- Finally, input the final quantity of your product.
- After you enter all these values, the price elasticity of demand calculator will automatically generate the Price Elasticity of Demand, Elasticity, Initial Revenue, Final Revenue, and the Revenue Increase.
How to calculate price elasticity of demand?
Gaining proficiency in managerial economics involves a lot of calculations. Ultimately, your goal is to determine how you can maximize your profits. Price elasticity of demand is a very useful concept because it shows how responsive quantity demanded is to a change in price. If you want to calculate this value without using a demand function calculator, follow these steps:
- Start by writing down the initial price of your product.
- Then determine the quantity of the initial demand. Think about how many pieces of the product would your customers demand each month.
- After that, decide about the new price of your product.
- Finally, measure the number of products you can sell for the new price you’ve set.
Take note that the value you get for the price elasticity of demand is just a number, it’s not a monetary value. For instance, the value you get will tell you how much is the increase in the quantity demanded when you have a specific percentage decrease in the price of your product.
Usually, the price elasticity of demand would have a negative value. This shows that it follows the law of demand. It’s uncommon to calculate a positive value for PED, but it does happen for certain products. For instance, caviar is a product which has a higher demand when it comes at a higher price. Generally, those who purchase caviar are very wealthy individuals, and they believe that the more expensive the product is, the higher quality it must be. So as the price of caviar increases, its demand increases as well. When it comes to price elasticity of demand, these rules apply:
- PED is perfectly elastic or PED = 0. In such a case, the price change doesn’t affect the demand. This is the usual case of products which are necessary for survival. No matter what the price is, people will still purchase these products. So if you lower the product’s price, the total revenue will drastically drop.
- PED is inelastic or -1 < PED < 0. In such a case, when you decrease the price of the product, the demand will increase, but you will experience a drop in your overall revenue.
- PED is unitary elastic or PED = -1. In such a case, the decrease of the price is directly proportional to the increase in demand. Also, there will be no change in the overall revenue.
- PED is elastic or -∞ < PED < -1. In such a case, decreasing the price would cause a drastic increase in the product’s demand along with the overall revenue.
- PED is perfectly elastic or PED = -∞. In such a case, any price increase will cause the demand for the product to drop to zero immediately. This applies to goods with a fixed-value wherein the law sets the prices of the products. In such a case, all the revenue will be lost.
What is the formula for elasticity of demand?
Although there are convenient elasticity calculators available, it’s still important for anyone in business to learn the formulas for manual computations. In this article, we’re discussing the price elasticity of demand. The PED indicates the ratio of the change in percentage in the demand for a certain product to a percentage change in the product’s price. The formula for elasticity of demand is:
Elasticity of demand = Percentage change in quantity demanded/Percentage change in price
Percentage change in quantity demanded = New quantity demanded (∆Q)/Original quantity demanded (Q)
Percentage change in price = New price (∆P)/Original Price (P)
On the other hand, the formula for PED is:
PED = [ (Q₁ – Q₀) / (Q₁ + Q₀) ] / [ (P₁ – P₀) / (P₁ + P₀) ]
P₀ refers to the product’s initial price;
P₁ refers to the product’s final price;
Q₀ refers to the initial demand;
Q₁ refers to the demand after the change in price;
How do you calculate change in demand?
The change in demand refers to a shift or a change in the total demand of the market. Graphically, it’s represented in a quantity versus price plane. The change in demand is a direct result of fewer or more market entrants as well as any changes in the preferences of consumers. The change can either be non-parallel or parallel.
A positive change in the demand even amidst constant shifts of supply would mean that there is an increase in the product’s quantity and price. Conversely, a negative change in demands means that both the quantity and price of the product will drop.
Simply put, the change in demand which has the symbol ∆Q is the difference between the new demand or Q1 and the original demand Q. You can calculate this with the following formula:
∆Q = Q1 – Q