Price Elasticity Calculator

Price Elasticity of Demand (PED) measures how sensitive quantity demanded is to price changes. Formula: PED = % Change in Quantity Demanded ÷ % Change in Price. Midpoint method (more accurate): PED = [(Q2-Q1) / ((Q2+Q1)/2)] ÷ [(P2-P1) / ((P2+P1)/2)]. Example: Price $100→$110 (+10%), Quantity 1000→900 (-10%). PED = -10% ÷ 10% = -1.0. Negative sign indicates inverse relationship (higher price = lower demand). Use absolute value for interpretation: |PED| = 1.0 means unit elastic. Standard method uses initial values as base, midpoint uses average - midpoint preferred for large changes to avoid directional bias.

Elasticity Classification: Perfectly Inelastic (PED=0): Demand unchanged regardless of price. Example: Life-saving medicine, insulin. Inelastic (0<PED<1): Demand relatively insensitive. Example: Gasoline, salt, utilities. Small quantity change vs price change. Unit Elastic (PED=1): Proportional change. 10% price increase = 10% quantity decrease. Elastic (PED>1): Demand highly sensitive. Example: Luxury items, restaurant dining, branded products. Perfectly Elastic (PED=∞): Any price increase = zero demand. Example: Perfectly competitive markets. General rule: |PED| < 1 = inelastic (price matters less), |PED| > 1 = elastic (price matters more). Always use absolute value - negative sign just indicates inverse relationship.

Revenue Impact Rules: Inelastic Demand (|PED| < 1): Price increase → Revenue increases. Price decrease → Revenue decreases. Example: 10% price increase, 5% quantity drop = +4.5% revenue. Why? Percentage gain in price outweighs percentage loss in quantity. Elastic Demand (|PED| > 1): Price increase → Revenue decreases. Price decrease → Revenue increases. Example: 10% price increase, 20% quantity drop = -12% revenue. Why? Percentage loss in quantity outweighs percentage gain in price. Unit Elastic (|PED| = 1): Price changes don't affect total revenue. 10% price up, 10% quantity down = revenue unchanged. Pricing Strategy: Inelastic products: raise prices to boost revenue. Elastic products: lower prices to increase volume and revenue. Unit elastic: compete on quality/service, not price.

Factors Increasing Elasticity (More Price Sensitive): Availability of substitutes: More alternatives = more elastic. Luxury vs necessity: Luxuries more elastic than necessities. Proportion of income: Expensive items relative to budget more elastic. Time horizon: Long-term more elastic (consumers find alternatives). Brand loyalty: Low loyalty = more elastic. Narrow market definition: "Coke" more elastic than "soft drinks". Factors Decreasing Elasticity (Less Price Sensitive): No close substitutes: Unique products less elastic. Necessity goods: Food, medicine, utilities less elastic. Small portion of income: Cheap items (salt, matches) less elastic. Addiction/habit: Cigarettes, coffee less elastic. Strong brand loyalty: Apple, luxury brands less elastic. Short time horizon: Immediate needs less elastic. Examples: Gasoline (short-term inelastic, long-term elastic). Restaurant dining (elastic - many alternatives). Prescription medicine (inelastic - no substitutes, necessity).

Standard Method: Formula: [(Q2-Q1)/Q1] ÷ [(P2-P1)/P1]. Uses initial values as base (Point A → Point B). Pros: Simple, intuitive. Cons: Different result depending on direction (A→B vs B→A). Less accurate for large changes. Use when: Changes are small (<10%). Only calculating one direction. Teaching basic concepts. Midpoint Method (Arc Elasticity): Formula: [(Q2-Q1)/((Q2+Q1)/2)] ÷ [(P2-P1)/((P2+P1)/2)]. Uses average of two points as base. Pros: Same result regardless of direction. More accurate for large changes. Symmetric calculation. Cons: Slightly more complex. Use when: Changes are large (>10%). Comparing elasticity between different price points. Need consistent measurements. Professional analysis. Recommendation: Use midpoint method for accuracy and consistency - it's the industry standard for economic analysis and eliminates directional bias in elasticity calculations.

Inelastic Demand Strategy (|PED| < 1): Pricing: Premium pricing - raise prices to increase revenue. Target: Loyal customers, necessity buyers. Examples: Utilities, pharmaceuticals, branded goods. Tactics: Emphasize quality, uniqueness, brand value. Avoid discounts - doesn't boost volume much. Focus on customer retention and loyalty programs. Elastic Demand Strategy (|PED| > 1): Pricing: Competitive pricing - lower prices to boost volume and revenue. Target: Price-sensitive customers, competitive markets. Examples: Electronics, fashion, restaurants. Tactics: Volume discounts, promotions, bundle deals. Price match guarantees. Focus on cost leadership and operational efficiency. Unit Elastic Strategy (|PED| = 1): Pricing: Neutral - price changes don't affect revenue. Focus: Differentiation, value-added services, brand experience. Tactics: Compete on quality, service, convenience, not price. Invest in customer experience and innovation. Dynamic Pricing: Use elasticity data to adjust prices by segment, time, location. High season (inelastic): raise prices. Low season (elastic): discount to maintain volume.

Highly Inelastic Products (|PED| < 0.5): Gasoline (short-term): 0.2 - need to commute regardless of price. Cigarettes: 0.3-0.5 - addiction reduces price sensitivity. Salt: 0.1 - cheap necessity, no substitutes. Electricity/Water: 0.1-0.3 - essential utilities. Prescription drugs: 0.2-0.4 - health necessity, no alternatives. Moderately Inelastic (0.5 < |PED| < 1): Coffee: 0.7 - habitual but has substitutes. Gasoline (long-term): 0.8 - can adjust commute, buy efficient car. Healthcare services: 0.6 - necessary but some flexibility. Moderately Elastic (1 < |PED| < 2): Restaurant meals: 1.5 - many alternatives, luxury. Clothing: 1.2 - can delay purchase, shop elsewhere. Beef/Pork: 1.3 - can substitute chicken, fish. Highly Elastic (|PED| > 2): Luxury cars: 2.5 - big purchase, many alternatives. International travel: 2.0 - discretionary, price-sensitive. Furniture: 2.5 - can delay, shop around. Fast food (specific brand): 3.0 - abundant substitutes. Business lesson: Know your product's elasticity to set optimal prices and predict revenue impact of price changes.