Briefly Price Elasticity of Demand is the percentage change in demand for a certain product in response to the percentage change in the price of that product. The elasticity of Demand is considered to be a very important concept in microeconomics and every entrepreneur must understand this idea while setting and changing the price of their products. If you don’t have any idea or concept of price elasticity of demand, then keep reading this post till the end. Here, we are going to explain, in brief, the whole concept and the types.
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Demand and Supply
We all know that economics is the game of demand and supply. Every business wants to achieve the position where the demand and supply of their product are in an equilibrium state for a certain price level. But, as the purpose of business is to maximize revenue or profit, they keep on playing with the price level. This change in price brings change in demand and hence change in revenue or profit as well.
If a product demand is high in the market and supply is not enough to meet the demand, then people buy it even at a high price. On the other hand, if there’s not much demand for a certain product, any increase in price will be a fool’s act.
Customers’ response is not always the same for the change in price. Sometimes a little increased price may bring a drastic reduction in demand. And sometimes the manufacturer may observe almost negligible change in demand of product even after a considerable change in price. This change in demand for a given change in price is termed as the elasticity of demand.
Calculating Elasticity of Demand
If you have the concept and know the formula, then that is a great thing. But if you don’t have a strong idea or don’t know how to calculate the elasticity of demand, then we have a solution for you. You can search on Google for Online Price Elasticity of demand calculator or read below. We have already bookmarked a similar calculator though we have a clear concept of price elasticity of demand. You can use the same price elasticity demand calculator because it’s very easy to use.
PrePostSEO has various tools, and it also has a very simple and easy to use price elasticity demand calculator. All you need to do is to put in the values and it will calculate the result for you.
But if you want to calculate the price elasticity of demand manually, using formula, then here below is the formula to calculate that:
Ep = (% change in Q) ÷ (% change in P)
Change in Q = (Q2 – Q1) ÷ Q1
Change in P = (P2 – P1) ÷ P1
Now you know the formula, but if you still don’t want to get involved in the calculations, the easiest way is to use price elasticity demand calculator, where you have to feed in the values and the calculations will be done automatically in a fraction of second.
Nature of Product or Service and Price Elasticity of Demand
When you calculate the price elasticity of demand, whether you calculate manually using formula or utilize price elasticity demand calculator, you will get a numerical value as an answer. This value can be 0, between 0 and 1, 1 or greater than 1. These four values or situations are actually four different types of situations of price elasticity of demand. And these situations or values define the nature of goods or services you are questioning.
Necessities are Perfectly Inelastic
If we observe absolutely no or just an ignorable change in demand due to a change in the price of a product or service, then we will get ZERO as an answer figure, after calculating the price elasticity of demand. If we get Zero as an answer, then the product is called Perfectly Inelastic. Perfect elasticity gives a vertical line on the graph.
Most of the necessities like flour, sugar, milk, fuel and power (electricity) are almost perfectly inelastic. We observe almost no change in the demand of these products even if there’s a change in the price. People will not stop eating or consuming electricity even if the price is increased and they will not start eating more than their appetite even if the price is decreased.
If the resultant figure is greater than ZERO but less than ONE, then the demand is termed as inelastic. This is because a bigger change in price will result in a slight change in demand. Now again, the products or services which are almost necessities will have inelastic demand. For example, we discussed electricity and fuel above. People cannot stop using electricity and fuel but they can become extra cautious in consumption if the price goes high. This cautiousness will bring a slight change in demand due to the change in price.
Unit Elastic Demand
It’s a rare situation like perfectly inelastic and perfectly elastic, but if the change in price brings the same proportional change in demand, then it is called Unit Elastic Demand. Most of the subsidiary goods have unit elastic demand.
Luxury Products Elastic
Luxurious products have greater than ONE elasticity of demand. That means a little change in price can bring a significant change in demand. For example, Netflix recently increased the price of their monthly subscription and they observed a major decrease in the number of subscriptions. Similarly, Uber observed the same situation when they increased the price of their business class taxi services and their decline was unexpectedly high.
Good in Perfect Competitive Market Are Perfectly Elastic
If there’s a perfectly competitive market, then a single supplier will lose all the customers even if the price is increased a little. In a perfectly competitive market, there is the huge number of suppliers for a single product and everyone knows the price of the product. If a supplier tries to sell at a higher price, the consumer will instantly shift from that supplier to another supplier. A product is said to be perfectly elastic if the resultant figure is infinity. It is denoted on the graph with a horizontal line for a given price level.
Here we tried to cover the topic completely and tried to explain every aspect in easy words so that a layman can understand even if they don’t have any knowledge of economics and other technical terms.