Price Elasticity

Price elasticity of demand is a measure of the response of the quantity demanded of a good to a change in its price.

Price elasticity of demand shows how much the demand for a particular good will change in percentage terms when its price changes by 1%.

• For elastic demand, when the price of a good changes by 1%, the demand for it will change by more than 1%. For example, if the price of bananas increases by 10%, the demand for them will fall by 15%, or if the price decreases by 25%, the demand will increase by 40%. In this case, we say that the demand for this product is price elastic.

For inelastic demand, when the price of a product changes by 1%, the demand for it will change by less than 1%. For example, if all types of vegetable oil increase in price by 49% and the volume of demand decreases by only 19%, it can be concluded that the demand for vegetable oil is inelastic in terms of price.

Information about the elasticity or inelasticity of demand for a product is very important for entrepreneurs.

If demand for a product is elastic, as in the case of bananas, the following pattern can be observed: if P (price) increases, Q (quantity sold) decreases by more than the price increases, or if P decreases, Q increases by more than the price decreases.

Price elasticity of demand is a measure of the response of the quantity demanded of a good to a change in its price.

Price elasticity of demand shows how much the demand for a particular good will change in percentage terms when its price changes by 1%.

Demand can be elastic or inelastic:

For elastic demand, when the price of a good changes by 1%, the quantity demanded will change by more than 1%. For example, if the price of bananas increases by 10%, the quantity demanded will fall by 15%, or if the price decreases by 25%, the quantity demanded will increase by 40%. In this case, we say that the demand for this good is elastic.
If demand for a product is inelastic, as in the case of vegetable oil, then if P decreases, Q increases to a lesser extent than the price decreases, or if P increases, Q decreases to a lesser extent than the price increases.

Consequently, to increase revenue from the sale of bananas, it is necessary to reduce their prices, and for vegetable oil, on the contrary, to increase them.

The MySales system automatically calculates the impact of price changes on demand. It also calculates the theoretically optimal points at which sales in units, money or margin will be maximised.

To calculate theoretically optimal prices using price elasticity, the ‘Price Optimisation’ module has been designed (detailed description in the Price Optimisation section).