How to Calculate Price Elasticity

Price Elasticity of Demand Calculator

Results:

Price Elasticity (PED):

Interpretation:

function calculatePED() { var P1 = parseFloat(document.getElementById('initialPrice').value); var P2 = parseFloat(document.getElementById('newPrice').value); var Q1 = parseFloat(document.getElementById('initialQuantity').value); var Q2 = parseFloat(document.getElementById('newQuantity').value); if (isNaN(P1) || isNaN(P2) || isNaN(Q1) || isNaN(Q2) || P1 === 0 || Q1 === 0) { alert("Please enter valid positive numbers for all fields."); return; } // Using the standard formula (Initial Point Method) // % Change in Quantity = (Q2-Q1)/Q1 // % Change in Price = (P2-P1)/P1 var percentChangeQuantity = (Q2 – Q1) / Q1; var percentChangePrice = (P2 – P1) / P1; if (percentChangePrice === 0) { document.getElementById('pedValue').innerText = "Infinite"; document.getElementById('pedInterpretation').innerText = "Perfectly Elastic"; document.getElementById('pedExplanation').innerText = "A change in quantity with no change in price suggests perfectly elastic demand."; document.getElementById('pedResult').style.display = "block"; return; } var ped = percentChangeQuantity / percentChangePrice; var absPed = Math.abs(ped); document.getElementById('pedValue').innerText = absPed.toFixed(4); var interpretation = ""; var explanation = ""; if (absPed > 1) { interpretation = "Elastic"; explanation = "Consumers are highly responsive to price changes. A small increase in price leads to a proportionately larger decrease in quantity demanded."; } else if (absPed 0) { interpretation = "Inelastic"; explanation = "Consumers are not very responsive to price changes. An increase in price leads to a proportionately smaller decrease in quantity demanded."; } else if (absPed === 1) { interpretation = "Unitary Elastic"; explanation = "The percentage change in quantity demanded is exactly equal to the percentage change in price."; } else if (absPed === 0) { interpretation = "Perfectly Inelastic"; explanation = "Quantity demanded does not change regardless of the price."; } document.getElementById('pedInterpretation').innerText = interpretation; document.getElementById('pedExplanation').innerText = explanation; document.getElementById('pedResult').style.display = "block"; }

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Understanding Price Elasticity of Demand (PED)

Price Elasticity of Demand (PED) is a fundamental economic metric that measures how sensitive the quantity demanded of a good is to a change in its price. Businesses use this calculation to determine pricing strategies and forecast how price hikes or discounts will impact their total revenue.

The Price Elasticity Formula

The basic formula for calculating price elasticity is the percentage change in quantity demanded divided by the percentage change in price:

PED = (% Change in Quantity Demanded) / (% Change in Price)

To calculate the percentage changes, we use the following:

• % Change in Quantity: (New Quantity – Initial Quantity) / Initial Quantity
• % Change in Price: (New Price – Initial Price) / Initial Price

How to Interpret the Results

When you calculate the PED, the result is typically a negative number because price and demand move in opposite directions (the Law of Demand). However, economists usually look at the absolute value (the positive version) for interpretation:

• • Elastic (PED > 1): Demand is very sensitive. Examples include luxury goods like jewelry or specific brands of electronics.
• • Inelastic (PED < 1): Demand is insensitive. These are often necessities like gasoline, electricity, or life-saving medications.
• • Unitary Elastic (PED = 1): Any change in price is offset exactly by a change in demand, keeping total revenue the same.

Real-World Example

Imagine a coffee shop sells 1,000 lattes a month at $5.00 each. They decide to raise the price to $6.00. As a result, they only sell 700 lattes.

1. Price Change: ($6 – $5) / $5 = 0.20 (20% increase)
2. Quantity Change: (700 – 1000) / 1000 = -0.30 (30% decrease)
3. PED: -0.30 / 0.20 = -1.5

The absolute value is 1.5. Since 1.5 is greater than 1, the demand for these lattes is elastic. The coffee shop lost more customers (proportionately) than the extra money they made from the price increase, likely resulting in lower total revenue.

Why Does Elasticity Matter?

If your product is inelastic, you can often raise prices to increase revenue because customers will keep buying regardless. If your product is elastic, raising prices might actually hurt your bottom line because customers will quickly switch to cheaper alternatives or competitors.