Price Elasticity Formula Examples How To Calculate

Formula to Calculate Price Elasticity

Price Elasticity = (Qf – Qi) / (Qf + Qi) ÷ (Pf – Pi) / (Pf + Pi)

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Price Elasticity = (∆Q/Q) ÷ (∆P/P)

Qi = Initial quantityQf = Final quantityPi = Initial price andPf = Final price

Price Elasticity Calculation (Step-by-Step)

Follow the below steps to calculate the price elasticity:

Firstly, determine the initial price and quantity demanded Quantity DemandedQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium.read more of the item. Pi and Qi, respectively, denote the initial price and demand.Then, determine the final price and quantity demanded of the item. The final price and demand are denoted by Pf and Qf, respectively.Next, calculate the percentage change in quantity demanded by dividing the change in demand by the average demand. The change in quantity is the difference between final and initial demands (Qf – Qi), while the average demand is (Qf + Qi)/2. Therefore, the percentage change in demand is expressed as – 2 * (Qf – Qi) / (Qf + Qi).Now, calculate the percentage change in price by dividing the change in price by the average price. The percentage change in price is expressed as – 2 * (Pf – Pi) / (Pf + Pi).Finally, the price elasticity can be derived by the percentage change in quantity demanded (step 3) by the percentage change in price (step 4), as shown below.

Examples

Example #1

Let us take the example of chocolate ice cream to understand the concept of price elasticity. If the price of the ice cream surged 20% in the last week, that resulted in a decline in demand for the same to the tune of 30%. Calculate the price elasticity based on the given information.

Use the following information to calculate price elasticity: –

Percentage change in demand: -30%Percentage change in price: 20%

Now, we can calculate the price elasticity by using the above formula: –

Price Elasticity = Percentage change in demand / Percentage change in price= -30% / 20%

Price Elasticity will be –

Price Elasticity = -1.50

Therefore, the ice cream demand exhibited a price elasticity of -1.5.

Example #2

Let us take the example of a company in soft drinks production. Currently, the company sells its soft drinks at $4.00 per bottle, drawing weekly demand of 3,000 bottles. Today, the company’s management has decided to cut the price by $0.50 per bottle, which is expected to increase the weekly demand by up to 4,000 bottles. Calculate the price elasticity based on the given information.

Initial demand of bottles (Qi): 3,000Final demand of bottles (Qf): 4,000Initial price per bottle (Pi): $4.00Final price per bottle (Pf): $3.50

Now, we can calculate the price elasticity as follows: –

Price Elasticity = (Qf – Qi) / (Qf + Qi) ÷ (Pf – Pi) / (Pf + Pi)= (4,000 – 3,000) / (4,000 + 3,000) ÷ (3.50 – 4.00) / (3.50 + 4.00)= (1,000 / 7,000) ÷ (-0.5 / 7.5)

Price Elasticity of weekly demand will be –

Price Elasticity = -2.14

Therefore, the price elasticity of the weekly demand for soft drinks is -2.14.

Example #3

Let us take the example of the beef sale in the U.S. in 2014 to illustrate how price elasticity works in the real world. In the ongoing food shortage, cattle prices surged from $3.47/lb to $4.45/lb in 10 months. As a result of the price surge, the regular consumption of a family of four was reduced from 10.0 lbs to 8.5 lbs. Calculate the price elasticity of beef demand.

Initial Demand (Qi): 10.0Final Demand (Qf): 8.5Initial Price: (Pi): $3.47Final Price (Pf): $4.45

Now, the price elasticity can be calculated as,

Price Elasticity = (Qf – Qi) / (Qf + Qi) ÷ (Pf – Pi) / (Pf + Pi)= (8.5 – 10.0) / (8.5 + 10.0) ÷ (4.45 – 3.47) / (4.45 + 3.47)= (-1.5 / 18.5) ÷ (0.98 / 7.92)

Price elasticity of the beef demand will be –

Price Elasticity = -0.66

Therefore, the price elasticity of beef demand was -0.66 during the food crisis of 2014.

Price Elasticity Calculator

You can use the following price elasticity calculator: –

Relevance and Uses

From the perspective of any business, understanding price elasticity is significant as it helps assess the relationship between the price of a good and the corresponding demand at that price. That is because the quantity demanded changes significantly with the price change have elastic demand Elastic DemandElastic demand refers to an economic concept which states that the demand for a good or service changes with the fluctuations in its price. If a product has an elastic demand, it will have more buyers when its price goes down and vice-versa. read more. Moreover, this characteristic is exhibited in by-products or services that have easily available alternatives; as such, the consumers relatively price sensitivePrice SensitivePrice Sensitivity, also known and calculated by Price Elasticity of Demand, is a measure of change (in percentage term) in the demand of the product or service compared to the changes in the price. It is used widely in the business world to decide the pricing of a product or study consumer behavior.read more.

On the other hand, goods for which quantity demanded do not change much, although a significant price change is known to have inelastic demand. This characteristic is exhibited when there is a lack of substitutes for the product or service, and consumers are willing to buy at relatively higher prices.

Formula to Calculate Price Elasticity#

Price Elasticity Calculation (Step-by-Step)#

Examples#

Example #1#

Example #2#

Example #3#

Price Elasticity Calculator#

Relevance and Uses#

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