Show of hands,
how many of you know how
to calculate price elasticity?
Well, if
you are like me you know
the general concept but the
math is a bit rusty. So here
is a quick and dirty refresher.
Price elasticity is a measure
of how demand for a product
is influenced by price changes.
This measure can help determine
whether to change the price
of products by calculating
what effect price changes
have on the quantities customers
purchase.
Price elasticity
can help to answer questions
like: If I increase my unit
price by 20%, how much unit
sales volume will I lose?
If I lower my unit price
by 10%, how much unit sales
volume will I gain?
To calculate
the price elasticity (PE)
PE = [(Q2-Q1) / ((Q1+Q2)
/ 2 )] / [(P2-P1) / ((P1+P2)
/ 2]
Where Q1
= initial quantity; Q2 =
final quantity; P1 = initial
price; P2 = final price
Understanding
the calculation results:
If
the PE > 1
the product is relatively
elastic. An increase in price
would result in a decrease
in revenue, and a decrease
in price would result in
an increase in revenue. If
the PE < 1 the product is
relatively inelastic. An
increase in price would result
in an increase in revenue,
and an decrease in price
would result in a decrease
in revenue.
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