Answers the Question
How much will changing my price affect the number of goods sold?
Calculator for Price Elasticity of Demand
What Is the Price Elasticity of Demand?
For most normal goods, the price elasticity of demand will be negative. This means that as a good's price increases, fewer of them will be sold.
The question is, which rises faster, the price of the good, or the quantity that customers will purchase?
When the price elasticity of demand is between 0 and -1, increasing the price will result in an increase in total revenue.
When the price elasticity of demand is less than -1, increases in price lead to a reduction in total revenues.
Why Is it Important?
- Companies are increasingly spending their money on fixed, rather than variable, costs. As a result, their costs remain fairly constant no matter the quantity of goods produced. As a result, they are better able to use customer buying preferences as a primary input for production decisions.
Formula(s) to Calculate Price Elasticity of Demand
- PRICE ELASTICITY OF DEMAND = ((NEW QUANTITY - OLD QUANTITY) / OLD QUANTITY) / ((NEW PRICE - OLD PRICE) / OLD PRICE)
- Assuming that the price elasticity is constant. The effects of price elasticity will depend greatly on the magnitude of price changes as well as their starting point.
- Assuming that price elasticity is always negative. Veblen goods, for instance, will tend to see higher demand for goods as their prices go up.
- Assuming that the only effects of price increases are monetary. Some pharmaceutical companies raised prices, resulted in higher profits as well as congressional inquiries and actions.
- Assuming that short-term profit is all that matters. For many goods, especially those with strong network effects, it may be better to keep prices low in order to establish a large customer base.
- Not considering profitability. What looks to be an ideal price (in terms of customer demand) may result in selling the good at a loss. Over the long term, this will lead to corporate bankruptcy, despite a high level of customer demand.