Price Elasticity Calculator
Calculate the price elasticity of demand
Elasticity Formulas
Understanding Price Elasticity
Price Elasticity of Demand (PED) measures how sensitive quantity demanded is to price changes. It answers: if I raise price by 1%, by what percentage will quantity demanded fall?
Elasticity is typically negative (price up → demand down) but often expressed as absolute value. An elasticity of -2 means a 1% price increase causes a 2% quantity decrease. Demand is 'elastic' if |E| > 1, 'inelastic' if |E| < 1.
Understanding elasticity is crucial for pricing strategy. With elastic demand, lowering prices increases revenue. With inelastic demand, raising prices increases revenue despite lower volume.
Elasticity Types
Elastic (|E| > 1)
Quantity changes more than price. Lower prices increase revenue.
Unit Elastic (|E| = 1)
Quantity and price change proportionally. Revenue unchanged.
Inelastic (|E| < 1)
Quantity changes less than price. Higher prices increase revenue.
Perfectly Inelastic
Quantity doesn't change. Essential goods with no substitutes.
Elasticity by Product Type
| Product Type | Typical Elasticity | Why | Strategy |
|---|---|---|---|
| Luxury goods | -2.0 to -4.0 | Many substitutes | Compete on value |
| Branded items | -1.0 to -2.0 | Brand loyalty | Build brand |
| Commodities | -0.5 to -1.0 | Price-driven | Cost leadership |
| Essentials | -0.1 to -0.5 | No alternatives | Premium pricing |
| Addictive goods | ~-0.3 | Habit/dependency | Steady pricing |
Using Elasticity for Pricing
Revenue Optimization
Elastic demand: lower prices. Inelastic demand: raise prices. Maximize at unit elasticity.
Segment by Elasticity
Different customers have different elasticities. Price discriminate accordingly.
Test and Measure
Run A/B tests with different prices. Measure actual demand response.
Consider Time Horizon
Short-term elasticity is usually lower than long-term. People adjust over time.
Frequently Asked Questions
Why use the midpoint method?
The midpoint method gives the same elasticity whether calculating price increase or decrease. Simple point elasticity gives different values depending on direction. Midpoint is more consistent.
What factors affect elasticity?
Availability of substitutes (more subs = more elastic), necessity vs luxury, proportion of income, time horizon, and brand loyalty all affect elasticity.
How do I estimate elasticity for my product?
Historical data analysis, A/B testing, conjoint analysis, or competitor pricing experiments. Start with industry benchmarks if no data available.
Can elasticity change?
Yes. Elasticity changes with price level (usually more elastic at higher prices), economic conditions, competitive landscape, and over time as substitutes emerge.
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