Price Elasticity of Demand Formula

Price Elasticity Of Demand Formula (Table of Contents)

• Price Elasticity Of Demand Formula
• Price Elasticity Of Demand Formula Calculator
• Price Elasticity Of Demand Formula in Excel(With Excel Template)

Price Elasticity Of Demand Formula

Price elasticity of demand is an economic measurement of how demand and supply change effect price of a product and vice versa. So, price elasticity is percentage change in quantity change to the percentage change in price.

The formula for calculating Price Elasticity Of Demand is as follows:

Where,

It means when demand or supply for any product change it will impact the price of a product in an economy. In the case of elastic goods with a change in price, demand, and supply of product get impacted whereas if a product is inelastic with a change in price, demand and supply do not change.

Examples of Price Elasticity Of Demand Formula

Let’s see an example to understand the price elasticity of the demand formula.

Example #1

Suppose a fancy soap was in demand in a town percentage of change in quantity demanded is 20% and the percentage change in price is 10%, the price elasticity of demand will be:-

Hence,

• Price Elasticity of Demand = Percentage change in Quantity Demanded/Percentage change in Price
• Price Elasticity of Demand = 20%/10%
• Price Elasticity of Demand =2%

So, price elasticity demand is 2%.

Price elasticity of demand is a slope of a demand curve. This curve tells us the impact on the price of change in demand and supply. The value of Price elasticity of demand is negative as price and demand are inversely proportional to each other and in the opposite direction if price increases demand decreases and if price decreases, demand increases.

Now, let us take another example to study the same.

Example #2

Plastic manufacturing companies which manufacture plastic box decide to decrease its price from $10 to $8 and predict an increase in monthly sales from 2,000 to 3,000 a month. To find price elasticity demand.

First,

We will calculate the percentage change in quantity demand.

• % change in quantity demanded = New quantity demanded – Old quantity demanded *100/Old quantity demanded
• % change in quantity demanded = 3000 – 2000 *100/2000
• % change in quantity demanded = 50%

Then we will find out the change in price by using the change in price formula

• % change in Price = New Price – Old Price *100/Old Price
• % change in Price = 8-10*100/10
• % change in Price = -20%

And now we will find out the Price Elasticity of Demand by using the below formula

• Price Elasticity of Demand = Percentage change in Quantity Demanded/Percentage change in Price
• Price Elasticity of Demand = 50%/-20%
• Price Elasticity of Demand = -2.5%

So, the price elasticity of demand is -2.5.

This means that demand is elastic.

Now, let us see the demand curve.

Demand Curve is the curve form due to the change in price and its demand. Below is the sample of a demand curve.

Price elasticity of demand on the demand curve

In the demand graph,

There is a different type of price elasticity of demand they are as follows:-

1. Perfect Inelastic Demand

In perfect inelastic demand, there is no change in demand with a change in price and value of price elasticity will be zero and the value of demand will be constant.

Here the demand curve is straight.

PED = 0

2. Relatively Elastic Demand

If the value of price elasticity demand is greater than one then a product is elastic. Here, the demand curve is gradually sloping.

1 < PED < ∞

3. Relatively Inelastic Demand

If a value of price elasticity demand is less than one then a product is inelastic. Here, the demand curve is rapidly sloping.

0 < PED < 1

4. Unit Elastic Demand

When the proportional change in demand produces the same change in the price then it is unit elastic demand.

PED = 0

5. Perfectly Elastic Demand

It means if there is the slight increase in price will lead to the decrease in demand and even demand can decrease to zero and if there is a slight decrease in price will lead to increase in demand and even demand can increase to infinity. The demand curve for perfectly elastic demand is a horizontal straight line.

PED = ∞

Law of Demand and Supply

• Law of Demand: Under all condition be equal demand law state that with an increase in the price of product demand for product decreases and with the decrease in the price of product demand for product increases. Hence the law of demand tells that price and demand are inversely related.

• Law of Supply: Under all state be constant supply law state that with the increase in the price of product supply for product increases and with the decrease in the price of product supply for the product decreases. Hence the law of supply tells that price and demand are directly related.

Now, we will see factors that affect price elasticity.

Factors that Affect Price Elasticity

• Number of Alternatives: There is multiples brand available in the market if the cost of the price of one product increases consumer can shift to other alternative brand and product.

• Price of Product in Relation to Income: When the income of family increases or decreases with it their demand for goods or services also changes. Here, demand and supply are elastic.

• Cost of Alternative: When one change goods or service from one brand to other there is a cost involved which could be in terms of fees or extra charges may be with it they are providing other benefits.. Hence the demand is inelastic.

• Brand Specific: Generally, people are brand specific and with an increase or decrease of the price, demand does not change which means demand is inelastic.

• Necessary for Goods: Some goods are there which consumers have to buy irrespective of price like medicines that means demand is inelastic.

Let us see one more example.

Example #3

Here, a two-year-old start-up manufacturing company wants to study the market and fix the price of its good as per the demand of consumer in the current economic situation. Two years a back company has 3000 consumers with the price of goods $100 and now they predicted to increase sales by 5000 after a decrease in price to $85.

• % change in quantity demanded = New quantity demanded – Old quantity demanded *100/Old quantity demanded
• % change in quantity demanded = 5000 – 3000 *100/3000
• % change in quantity demanded = 200000/3000
• % change in quantity demanded = 66.66%

Then we will find out the change in price by using the change in price formula

• % change in Price = New Price – Old Price *100/Old Price
• % change in Price = 80 – 100*100/100
• % change in Price = -20%

And now we will find out the Price Elasticity of Demand by using the below formula

• Price Elasticity of Demand = Percentage change in Quantity Demanded/Percentage change in Price
• Price Elasticity of Demand = 66.66/-20
• Price Elasticity of Demand = -3.33

So, the price elasticity of demand is -3.33 which means the product is elastic.

Now see a graph for the same.

Graph for Price Elasticity of Demand

Significance and Use

There are many uses of price elasticity of demand they are as follow:-

• It helps a company to analyze the impact of price change.
• It helps the government while making taxation policy.
• A company takes various decisions based on the price elasticity of demand study like a tax to be paid by customer or self.
• Help to implement price discrimination concept where a product has a different price in a different market.

There is one disadvantage to the company in the case of elastic demand when it does not know what price to be fixed for selling as if the price is the high consumer will not buy and if the price is a low company will face loss. The price elasticity of demand affects consumers as well as industries. Price elasticity of demand helps the company to fix its price, calculate and predict sales and revenue.

Price Elasticity Of Demand Formula Calculator

You can use the following Price Elasticity Of Demand Calculator

Price Elasticity Of Demand Formula in Excel (With excel template)

Here we will do the same example of the Price Elasticity Of Demand formula in Excel. It is very easy and simple. You need to provide the two inputs i.e % change in Quantity Demanded and % change in Price

You can easily calculate the Price Elasticity of Demand using Formula in the template provided.

In, this template we have to solve the Price Elasticity Of Demand Formula

Price Elasticity of Demand for fancy soap is calculated as:

Price Elasticity of Demand for plastic manufacturing companies is calculated as:

First, we will calculate the % change in quantity demanded

Now, we will Calculate the % change in price

At the Last, we are going to find the Price Elasticity of Demand Formula

Price Elasticity of Demand for manufacturing company is calculated as:

First, we will calculate the % change in quantity demanded

Now, we will Calculate the % change in price

At the Last, we are going to find the Price Elasticity of Demand

You can download this Price Elasticity Of Demand Formula Excel Template here – Price Elasticity Of Demand Formula Excel Template

Conclusion – Price Elasticity Of Demand Formula

There is one disadvantage to a company in the case of elastic demand when it does not know what price to be fixed for selling as if the price is the high consumer will not buy and if the price is low company will face loss. The price elasticity of demand affects consumers as well as industries. Price elasticity of demand helps a company to fix their price, calculate and predict sales and revenue.

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This has been a guide to the Price Elasticity Of Demand Formula, here we discuss its uses along with practical examples. We also provide you with a Price Elasticity Of Demand calculator along with a downloadable excel template.

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