Price Elasticity Calculator

Price Elasticity: 1.00

Interpretation: This number represents the expected volume loss in the event of a percent change in price. A figure of 1.00 means that for every 1% increase in price, you will lose 1% of your unit volume.

In this specific case, the price was increased by 20.00% and in response, the quantity demanded decreased by -20.00%.

Crucial point:The change is unit volume and NOT dollar sales or operating profit; the difference between these things is the essence of price-based business improvement strategies.

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Interpreting Results

This price elasticity of demand calculator is intended to give you a quick perspective on the degree to which demand (or supply) changes in response to a change in price. This is a key concept in economics. In the real world, the change in demand is driven by customers switching to alternative suppliers or substitute solutions.

The threat of substitute products and suppliers should be taken into consideration when analyzing real world price elasticity questions. This is a two level threat - if there is substantial competition, the customer can look to move their demand to another source. This is common with commodity products and items with low switching costs. For example, consider the position of a commodity grade steel manufacturer selling an industry standard grade. In this situation, their product is (supposedly) the exact same product every other steel manufacturer is making, so their customers can easily switch in the event of a price increase. We describe demand for their product as highly elastic (quantity changes rapidly in response to price changes).

Compare our steel maker with a machine shop who makes specialty replacement parts with complex specifications and has developed a a reputation for quick turnaround on difficult custom projects. Since their customers are often short on time, they have a certain advantage when it comes to pricing. So they can often increase the price of their product with minimal loss of demand. We would describe their offering as being relatively inelastic (quantity demanded isn't sensitive to price).

There is also the threat of substitution (using a different product) or the customer electing to go without. For example, if the price of gasoline increased, there will be greater interest in alternative fuels (decreasing unit demand for gasoline). Customers are also likely to drive less (this has been shown in studies), since the cost of the trip has increased (assuming the value of the trip remains constant). Price Elasticity isn't necessarily constant within a population of customers - in our gasoline example, delivery drivers are less likely to stop driving (no delivery, no pay) than people who take recreational camping trips (perhaps they spend the day at a local, closer, park).

From a business strategy perspective, you should strive to differentiate your services to a customer as much as possible to create switching costs. Switching costs are the costs and inconvenience associated with moving to another supplier. As we noted above, these differ by product type, channel (level of market competition), and customer segment. A good pricing strategy navigates these differences to maximize your operating profits.

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