EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login

Elastic Demand Formula

By Madhuri ThakurMadhuri Thakur

Home » Finance » Blog » Economics » Elastic Demand Formula

Elastic Demand Formula

Elastic Demand Formula (Table of Contents)

  • Formula
  • Examples

What is the Elastic Demand Formula?

The term “Elastic Demand” refers to the strong movement witnessed in a product’s demand due to changes in other economic factors, primarily product price and consumer income. In other words, the slight change in either producer price or consumer income will result in a huge change in the demand for the subject product. So, product demand is called to be elastic only when the elasticity of demand is more than one. Based on the driving economic factors, there are two major types of elasticity of demand:

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

1. Price Elasticity of Demand

2. Income Elasticity of Demand

The price elasticity of demand is known as elastic demand when the percentage increase in demand is greater than the percentage decline in the product price. Mathematically, it is represented as,

(D1 – D0) / (D1 + D0) > – (P1 – P0) / (P1 + P0)

Where

  • D0: Starting Demand
  • D1: Closing Demand
  • P0: Starting Price
  • P1: Closing Price

The income elasticity of demand is known as elastic demand when the percentage increase in demand is greater than the percentage increase in consumer income. Mathematically, it is represented as,

(D1 – D0) / (D1 + D0) > (I1 – I0) / (I1 + I0)

Where

  • D0: Starting Demand
  • D1: Closing Demand
  • I0: Starting Income
  • I1: Closing Income

Example of Elastic Demand Formula (With Excel Template)

Let’s take an example to understand the calculation of Elastic Demand in a better manner.

You can download this Elastic Demand Formula Excel Template here – Elastic Demand Formula Excel Template

Elastic Demand Formula – Example #1

Let us take the example of a company that manufactures soft drinks to illustrate the price elasticity of demand. Recently the company reduced the price from $1.50 per bottle to $1.45 per bottle, which resulted in a sales increase from 40,000 bottles to 50,000. Based on the given information, calculate if the demand for soft drinks is elastic or not.

Manufactures Soft Drinks

Solution:

Percentage Increase in Demand is calculated using the formula given below.

Popular Course in this category
Sale
Investment Banking Course (123 Courses, 25+ Projects)123 Online Courses | 25 Hands-on Projects | 600+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.9 (14,254 ratings)
Course Price

View Course

Related Courses
Mergers & Acquisition Course (with M&A Projects)Financial Modeling Course (7 Courses, 14 Projects)

Percentage Increase in Demand = 2 * (D1 – D0) / (D1 + D0)

Elastic Demand Formula - 1.2

  • Percentage Increase in Demand = 2 * (50,000 – 40,000) / (50,000 + 40,000)
  • Percentage Increase in Demand = 22.2%

Percentage Decrease in Price is calculated using the formula given below.

Percentage Decrease in Price = 2 * (P0 – P1) / (P1 + P0)

Percentage Decrease in Price

  • Percentage Decrease in Price = 2 * ($1.50 – $1.45) / ($1.45 + $1.50)
  • Percentage Decrease in Price = 3.4%

So, it can be seen that the percentage increase in demand is greater than the percentage decrease in price. Therefore, it is an example of elastic demand.

Price Elasticity of Demand is calculated as

Elastic Demand Formula - 1.4

Elastic Demand Formula – Example #2

Let us take the example of the demand for ice cream and illustrate how it changes with the change in consumer income. As the per capita income increased from $2,000 to $2,500, the per capita per year consumption of ice cream increased from 10lbs to 15lbs. Based on the given information, calculate if the demand for ice cream is elastic or not.

Demand for Ice Cream

Solution:

Percentage Increase in Demand is calculated using the formula given below.

Percentage Increase in Demand = 2 * (D1 – D0) / (D1 + D0)

Elastic Demand Formula - 2.2

  • Percentage Increase in Demand = 2 * (15 – 10) / (15 + 10)
  • Percentage Increase in Demand = 40.0%

Percentage Increase in Income is calculated using the formula given below.

Percentage Increase in Income = 2 * (I1 – I0) / (I1 + I0)

Percentage Increase in Income

  • Percentage Increase in Income = 2 * ($2,500 – $2,000) / ($2,500 + $2,000)
  • Percentage Increase in Income = 22.2%

So, it can be seen that the percentage increase in demand in greater than the percentage increase in income. Therefore, its demand for ice cream is elastic in nature.

Income Elasticity of Demand is calculated as

Elastic Demand Formula - 2.4

Explanation

The formula for Elastic Demand can be calculated by using the following steps:

Step 1: Firstly, calculate the increase in demand for the subject product, which is denoted by (D1 – D0), such that D1 > D0.

Step 2: Next, calculate the average demand of the product, which is denoted by (D1 + D0)/2.

Step 3: Next, calculate the percentage increase in demand by dividing the increase in demand (step 1) by the average demand (step 2) of the product.

Percentage Increase in Demand = 2 * (D1 – D0) / (D1 + D0)

Step 4: Next, calculate the decrease in producer price of the product, which is denoted by (P0 – P1), such that P1 < P0

Step 5: Next, calculate the average price of the product, which is denoted by (P1 + P0)/2.

Step 6: Next, calculate the percentage decrease in price by dividing the decrease in price (step 4) by the average price (step 5) of the product.

Percentage Decrease in Price = 2 * (P0 – P1) / (P1 + P0)

Step 7: Finally, the formula for elastic demand due to producer price is when the percentage increase in demand (step 3) is greater than the percentage decline in the product price (step 6), as shown below.

2 * (D1 – D0) / (D1 + D0) > 2 * (P0 – P1) / (P1 + P0)

  • (D1 – D0) / (D1 + D0) > – (P1 – P0) / (P1 + P0)

Similarly, the formula for elastic demand due to consumer income can be derived by replacing the percentage decrease in producer price with the percentage increase in consumer income.

(D1 – D0) / (D1 + D0) > (I1 – I0) / (I1 + I0)

Relevance and Use of Elastic Demand Formula

It is an interesting topic if you belong to a company’s pricing team or part of the government’s financial planning wing. Based on elastic demand, the pricing team can make changes in the product price (such as discounts, offers, etc.) in order to get the desired demand drive. On the other hand, the government can implement policy changes (such as reduction of taxes) to boost consumer income which will eventually percolate to increasing demand.

Recommended Articles

This is a guide to Elastic Demand Formula. Here we discuss how to calculate the Elastic Demand along with practical examples. We also provide an Elastic Demand downloadable excel template. You may also look at the following articles to learn more –

  1. What is Demand Elasticity?
  2. Calculation of Price Elasticity of Demand
  3. Example of Price Elasticity of Supply
  4. How to Calculate Elasticity Formula?

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)

250+ Online Courses

40+ Projects

1000+ Hours

Verifiable Certificates

Lifetime Access

Learn More

0 Shares
Share
Tweet
Share
Primary Sidebar
Finance Blog
  • Economics
    • What is Command Economy?
    • Tax Reform
    • Green Field Investment
    • Elastic Demand Formula
    • Tax Sale
    • Gross Income vs Net Income
    • NASDAQ vs NYSE
    • Trade Deficit
    • Tax Shelter
    • Form 10 K
    • International Investment
    • Leading vs Lagging Indicators
    • Nominal GDP vs Real GDP
    • Monetary Policy vs Fiscal Policy
    • Foreign Direct Investment
    • CRR vs SLR
    • Elasticity of Demand Example
    • Economics Example
    • Negative Correlation Example
    • Economies of Scale Example
    • Macroeconomics vs Microeconomics
    • Macroeconomics Problems
    • Perfect Competition vs Monopolistic Competition
    • CPI vs RPI
    • Elastic Demand vs Inelastic Demand
    • Primary Market vs Secondary Market
    • Monopoly vs Monopolistic Competition
    • Supply vs Demand
    • Duty vs Tariff
    • Deflation vs Disinflation
    • Inflation vs Interest Rates
    • Repo Rate vs Reverse Repo Rate
    • Price Elasticity of Demand Formula
    • Oligopoly vs Monopoly
    • Monopoly vs Perfect Competition
    • Cross Price Elasticity of Demand Formula
    • Demand Pull Inflation
    • Variance Analysis
    • Money vs Currency
    • Mean vs Median
    • Nominal vs Real Interest Rates
    • Tax Evasion vs Tax Avoidance
    • Career in Economics
    • Bank Rate vs Repo Rate
  • Accounting fundamentals (658+)
  • Asset Management Tutorial (198+)
  • Banking (44+)
  • Corporate Finance Basics (248+)
  • Credit Research Fundamentals (6+)
  • Finance Formula (382+)
  • Financial Modeling in Excel (13+)
  • Investment Banking Basics (120+)
  • Investment Banking Careers (26+)
  • Trading for dummies (67+)
  • valuation basics (27+)
Finance Blog Courses
  • Investment Banking Course
  • Mergers & Acquisition Course
  • Financial Modeling Course
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

Special Offer - Investment Banking Course Learn More