Price Elasticity of Demand Calculation Example
How to find the price elasticity of demand?
Price Elasticity of Demand Formula
Price elasticity of demand (PED) is a measure of the relationship between the percentage change in the quantity demanded of a good and a percentage change in its price. It is calculated by dividing the percentage change in the quantity demanded by the percentage change in the price.
Calculation Steps
Block's sells 500 bottles of perfume a month when the price is $7. A huge increase in resource costs forces Block's to raise the price to $9, and the firm only manages to sell 460 bottles of perfume.
The percentage change in the quantity demanded is calculated using the formula:
Percentage change in quantity demanded = ((New quantity demanded - Original quantity demanded) / Original quantity demanded) × 100%
The percentage change in the price is calculated using the formula:
Percentage change in price = ((New price - Original price) / Original price) × 100%
By dividing the percentage change in quantity demanded by the percentage change in price, we can find the price elasticity of demand.
Understanding Price Elasticity of Demand
Price elasticity of demand is a crucial concept in economics that helps businesses understand how consumers react to changes in prices. In the case of Block's perfume sales, the price elasticity of demand was calculated to be 0.5714.
A price elasticity of demand below 1 indicates that the good is inelastic, meaning that changes in price have a relatively small impact on quantity demanded. On the other hand, a price elasticity of demand above 1 indicates that the good is elastic, implying that changes in price have a significant impact on quantity demanded.
By knowing the price elasticity of demand, businesses can make informed decisions about pricing strategies and forecasting sales. It is essential to regularly monitor and analyze price elasticity to adjust pricing strategies in response to changing market conditions.
Price elasticity of demand is a valuable tool for businesses to optimize revenue and profitability by understanding consumer behavior and market dynamics. By calculating the price elasticity of demand, Block's can assess the effectiveness of price changes on perfume sales and make strategic pricing decisions to maximize profits.