# Price Elasticity of Demand Calculator

Calculate how the price change of services / goods relates to the demand for the same goods and services to allow effective stock release / service control to sustain profitable sell rate(s).

 Initial Price: New Price: Initial Quantity: New Quantity:
 Price Elasticity of Demand:

## Price Elasticity of Demand: Defining a perfect price for your product

Elasticity is a simple word that describes the ability of an object to resume its normal shape after being stretched or compressed. But have you ever considered how this simple term has a big impact when combined with the demand of the products your company is producing?

Price Elasticity of Demand measures the demand of a product with relation to its price. In other words, it shows how much, as a percentage of your product, would increase in demand if the price was decreased and vice-versa.

### The Elastic & Inelastic goods/services

Not all the goods have the same elasticity. Let's have a look at how different products respond differently to price changes:

#### Elastic Goods

These are the products for which price change drive significant movement in their demand. To give an instance, sweets like candies are a highly elastic products. This is because they can be substituted very easily with other sweet products like cookies or cakes, hence the price increase of a candy can drive and immediate decrease in its demand as there is significant competition and alternate choices.

#### Inelastic Goods

On the other hand, some essential products like milk and petroleum are considered inelastic. Inelasticity takes place due to lack of substitution. This happens because the price change is irrelevant for these products. Fuel is a superb example as despite the very large increases in the cost of filling cars, people will still use the same amount of gasoline as there is no viable alternative (electric cars are becoming more efficient but they are not yet a like for like solution to replace fossil fuel vehicles). So even if the price keeps increasing the demand doesn't really decrease.

## Price elasticity in the service industry

Price elasticity does exist in the service industry as well. A good example is passenger taxi service provider applications like Uber. The concept of surge price is very common in this industry. Surge pricing or dynamic pricing is used to get the most out of a time when demand changes. The surge is increased at peak hours, which increases the price of the service but is demanded in the same quantity because of peak hours thus generating more profits.

## Disadvantage of using the price elasticity of demand

The elasticity of demand is not very useful for companies that lack market insight into relevant prices that the market will support. If they reduce the price too much, they can lose money if the sales rate drops below break even rates (it costs more to produce the good than they are getting on the market), though this breakneck pricing ration can facilitate market penetration, particularly in high competition markets though it is a strategy that requires very careful consideration and a robust accounting plan to ensure that, holistically, the company is capable of absorbing the costs of the initiative. On the other hand, if they increase the price too high people might look for alternatives that will decrease the sale of overpriced product.

## How does the Price Elasticity of Demand calculator work?

The price elasticity of demand uses the following accounting formula:

PE = QD / CP

Where:

• PE = Price Elasticity of Demand
• QD = Proportionate Change in quantity demanded
• CP = Proportionate Change in price

The figures that are required for the calculations are:

• Initial Price - This is the price that was offered to the buyer before the changes.
• New Price - The changed price for the same product or service.
• Initial Quantity - This refers to the demand that occurred with the initial price offering.
• New quantity - This is the amount of quantity that is sold after the price change.

On the basis of your input the calculator will provide you with a price elasticity of demand ratio.

The range of responses obtained from the calculator can be interpreted in different ways as follows:

• A price elasticity of demand that is less than one defines that the product or service is inelastic.
• Greater than one value of elasticity of demand means the product is elastic.
• Zero value shows that the product is perfectly inelastic.
• The value Infinite defines the product as perfectly elastic.

If quantity demanded changes proportionately, then the value of price elasticity of demand is 1, which is called unit elasticity. Put simply, this means the change in demand is perfectly responsive to the price change. You can think of it as unit to unit basis or the datum point.

### Benefits of using the online calculator

This is how you can take advantage of Price Elasticity of Demand calculator.

• The results: The calculator provides you with accurate results that help you predict the future elasticity of demand for your product.
• Time saving: Since the calculator is simple and easy to use, it saves you plenty of time and provides quick insight into price/demand fluctuations.
• Easy to use: Complex calculations are made simple with this calculator; you just need proper data to get accurate results. This is particularly useful if you are a small company and don't have dedicated account or business analyst's but want to review your supply and demand pricing performance.

Sound business knowledge of market pricing plays a major role in the calculations that support you to create appropriate strategies linked to supply and demand to leverage and efficient, sustainable and profitable business. Using the price elasticity of demand method is useful when you want to decide on the perfect pricing of your products or services to support those business decisions.