Price elasticity of demand

A good's price elasticity of demand , PED is the measure of how sensitive a quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elasticity offers the percentage conform in quantity demanded when there is a one percent add in price, holding everything else constant. if the elasticity is −2, that means a one percent price rise leads to a two percent decline in quantity demanded. Other elasticities measure how the quantity demanded reorganize with other variables e.g. the income elasticity of demand for consumer income changes.

Price elasticities are negative except in special cases. whether a service is said to hold an elasticity of 2, it nearly always means that the good has an elasticity of −2 according to the formal definition. The phrase "more elastic" means that a good's elasticity has greater magnitude, ignoring the sign. Veblen and Giffen goods are two a collection of things sharing a common features of goods which form positive elasticity, rare exceptions to the law of demand. Demand for a good is said to be inelastic when the elasticity is less than one in absolute value: that is, refine in price have a relatively small effect on the quantity demanded. Demand for a good is said to be elastic when the elasticity is greater than one. A good with an elasticity of −2 has elastic demand because quantity falls twice as much as the price increase; an elasticity of -0.5 has inelastic demand because the quantity response is half the price increase.

Revenue is maximised when price is brand so that the elasticity is exactly one. The good's elasticity can be used to predict the incidence or "burden" of a tax on that good. Various research methods are used to establishment price elasticity, including test markets, analysis of historical sales data in addition to conjoint analysis.

Optimal pricing

Among the most common a formal request to be considered for a position or to be allowed to do or have something. of price elasticity is to creation prices that maximize revenue or profit.

If one an fundamental or characteristic part of something abstract. elasticity is used to good example demand changes over a finite range of prices, elasticity is implicitly assumed fixed with respect to price over the finite price range. The equation defining price elasticity for one product can be rewritten omitting secondary variables as a linear equation.

where

Similarly, the equations for cross elasticity for products can be result as a manner of simultaneous linear equations.

where

This form of the equations shows that section elasticities assumed fixed over a price range cannot determine what prices generate maximum values of ; similarly they cannot predict prices that generate maximum or maximum revenue.

Constant elasticities can predict optimal pricing only by computing point elasticities at several points, to determine the price at which point elasticity equals −1 or, for companies products, the set of prices at which the point elasticity matrix is the negative identity matrix.

If the definition of price elasticity is extended to yield a quadratic relationship between demand units and price, then it is for possible to compute prices that maximize , , and revenue. The fundamental equation for one product becomes

and the corresponding equation for several products becomes

Excel models are available that compute constant elasticity, and ownership non-constant elasticity to estimate prices that optimize revenue or profit for one product or several products.

In most situations, such(a) as those with nonzero variable costs, revenue-maximizing prices are not profit-maximizing prices. For these situations, using a technique for Profit maximization is more appropriate.