What is Price Elasticity of Demand?

8 August 2016

Today’s market focuses on a chain of supply and demand. The products which are in demand are the products which are produced and supplied in the market. This process is vice-versa. The demand of also increases with an increase in the production of the goods and the production also increases when there is demand for the product created in the market. This fundamental concept is fairly easy to understand. Now there are several factors which shape and garner this demand.

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There are ways to actually calculate whether a product is in demand or not. Well, we can always map out the demand of a product by looking at the graphs and pie charts that are made but there is basic concept which can actually aid a lot in the process and make it much easier. This concept is the price elasticity of demand. What it basically focuses on is whether a product is in demand or not or how is the demand of the product affected when there is a change in the price.

Suppose there is a product in the market, the price of which goes down, and then if the demand for the product increases by leaps and bounds then the elasticity of demand of the product is definitely high, because people favour this product. The products which show little or no change as such when the price is reduced are not in demand and therefore it has a low elasticity of demand. How is it calculated? There is one particular formula which makes the calculation of the price elasticity of demand very easy.

With the help of this formula you will be able to reach the desired value within just a few short minutes. The basic formula to carry out this calculation is- Price Elasticity of Demand= % change in demand/ % change in price The values of both the percentage change in demand and the percentage change in price have to be calculated separately and then simply by dividing the former by the latter we will be able to reach the desired value.

Let us try and figure out how we can calculate these two essential values which will ultimately give us the price elasticity of demand of a product. Calculating % change in demand To calculate the percentage change in demand we need some data. We need to know the change in demand corresponding to the change in price. Suppose the quantity demand of a product which was 190 units has now gone down to 180 units with an increase in the price. So, in order to calculate the % change in demand we have to subtract the old demand from the new demand and then divide it by the new demand.

The result in this case will be a negative decimal value. Calculating % change in price We have to follow a similar method of calculation for % change in price as well. The old and the new price will be given and we will have to subtract the old price from the new price and then divide this value by the old price. Once we have the values of % change in demand and % change in price, we just have to substitute them in the first formula and calculate the price elasticity of demand of a particular product.

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