Price Elasticity of Demand

What it does:
Price elasticity of demand helps predict the impact that price changes will have on product sales. When you raise a product's price, how many will you lose? If you lower the price, how many customers will you gain?

Its other names:
Price elasticity.

Where it comes from:
Price elasticity on demand is a standard tool in economics for predicting the impact that pricing has on sales.

Summary:
Products can be classified along a scale from perfectly inelastic (consumers will pay virtually anything for it because the need is so great -- i.e. insulin for diabetics) or perfectly elastic (i.e.,wheat produced by one small farmer). Many factors influence where a product falls along that scale. The more differentiated the product (the fewer close substitutes there are) the fewer places the consumer can go satisfy the same need and. thus, the more you can charge for the product. That is a more inelastic product.

You can use the formula below to determine the price elasticity at the spot between the two prices you have selected.

What else you need to know:
Look for a used economic textbook to explore this concept in more detail. The Price Elasticity formula is an interesting starting point. Other factors however play a role such as your competition's reaction to your pricing, new competitors in the market, and changing demand due to a shift in consumer preferences. Still, price elasticity of demand can help develop you to determine ballpark figures for the impact of pricing on sales.