The demand for certain products are sensitive to any change in price, and being able to determine how changing prices will affect revenue is called Price Elasticity of Demand, or Demand Elasticity.
Jenn, Founder Calcworkshop®, 15+ Years Experience (Licensed & Certified Teacher)
For items or products that people have deem essential, like bread or milk, tends to be what we call Inelastic. Even if the price goes up, people are still going to buy it.
Whereas, items that people consider a luxury, like cars or new clothes, tend to be Elastic. If the price goes up, people will either not buy or can do without or put off until later, thus causing revenue to drop.
So how do we best determine whether or not to increase or decrease prices in order to increase Revenue?
The Elasticity of Demand Formula.
Price Elasticity of Demand
The formula for Elasticity measures how demand reacts to price changes. This means the particular prices and quantities don’t matter, and everything is treated as a percent change, as Grove City College accurately states.
In other words, if the price increases by 1%, the demand will decrease by E%.
Together we will look at five examples in detail, and learn how to determine if raising prices will increase or decrease revenue.
Elasticity of Demand – Video
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