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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This entry was posted on August 23, 2006 at 2:15 am and is filed under Supply Chain Metrics. You can follow any responses to this entry through the RSS 2.0 feed.
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