Calculate the best price of your product based on the price elasticity of demand. Use this calculator to determine the elasticity of your product.
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Price Elasticity of Demand Formula
The following formula can be used to calculate the price elasticity of demand:
PED = [ (Q₁ – Q₀) / (Q₁ + Q₀) ] / [ (P₁ – P₀) / (P₁ + P₀) ]
- Where PED is price elasticity of demand
- P₀ is the initial price
- P₁ is the final price
- Q₀ is the initial demand (in units)
- Q₁ is the final demand after price change
The higher the magnitude elasticity the higher the result increase in revenue will be with a decrease in price. A low elasticity will mean that a decrease in price will only result in a small increase in revenue.
Price Elasticity of Demand Definition
The price elasticity of demand is a way of measuring the effect of changing price on an item, and the resulting total number of sales of the item. In other words, it’s a metric to see if increasing or decreasing the price of a product will increase it’s total revenue.
How to calculate price elasticity of demand
Lets, take a look at an example of how one might use this calculator, or calculate the price elasticity of demand.
First, let’s assume you have a product that you have been selling for a year. That product currently costs $5.00 and sells at 10 units per day.
Next, we want to experiment with decreasing the price of this item so we chose to lower the item to $4.50. This results in an increase in sales to 15 units per day.
Using the calculator above, we find that the price elasticity of demand is equal to -3.8. As mentioned above the greater the magnitude the greater the elasticity. Even though the result is negative, the magnitude is much greater than 1, which is what matters.
PEOD and your Business
The reason PED is important for running your business is because of it’s effect on revenue. Revenue, along with costs, are the driving forces of business performance. If you can drastically increase your business performance through a quick understanding and research of PED, then it’s like worth your time.
PED can be broken down into two separate categories. The price effect and the quantity effect.
The price effect is the analysis of how a change in price will change total revenue. For inelastic goods an increase in price will lead to an increase in revenue and vise versa. For elastic goods, this is not always true. An increase in price my lead to a drastic decrease in sales and revenue.
The quantity effect is described as the lowering in total units sold due to a higher price and an increase in units sold with a decrease in price.
It’s important to understand that the optimal price point of a unit is constantly changing. This means that the PED must be researched and analysed monthly to understand the optimal price point.