Price elasticity is a term in microeconomics, which focuses on determining and changing the demand for products thereafter.
Not a few businessmen who pay less attention or may be less sensitive to price changes and risks or responses that may be given by their customers.
In theory, to get the best figure on the pricing instrument of a product, a businessman must understand price elasticity formula.
Because the law of supply and demand pricing greatly affects the achievement of the target of the business.
Therefore, as a businessman it’s good you learn exactly what it is price elasticity of demand, because it can affect the continuity of your business.
For this reason, this article will try to thoroughly discuss the understanding, examples and how to calculate it.
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What is price elasticity?
Broadly speaking price elasticity is a term for the sensitivity and influence of product demand, after a change in price.
By law, the demand for price changes always affects the demand of your loyal customers.
How to calculate price elasticity and examples
Price elasticity of demand it can be calculated by dividing the percentage change in demand by the percentage change in price.
Here are the details price elasticity formula commonly used:
Price Elasticity= % Change in the number of requests ⑴ % change in price
Let’s take an example price elasticity of demand and how to calculate it from the following problem:
There is a small bakery that sells an average of 100 loaves of bread per week for Rp10, 000.00 per pcs.
The bakery decided to increase the price to Rp12.000, 00.
However, because of the price increase, consumers are switching to other bakeries that are cheaper.
As a result, the bakery suffered a decline in sales and only sold an average of 80 loaves of bread per week.
From the illustration above, you first need to calculate the change in the quantity of demand before going into the price elasticity formula.
In this case, the initially able to sell 100 to 80.
Then, calculate the percentage change in demand quantity using the following formula:
Change in demand quantity = (Final amount-initial amount) Initial amount x 100%
= 80 – 100 x 100%
Next, calculate the percentage change in price using the formula:
Price change = (Final price-initial price) Initial price x 100%
= (Rp12, 000.00 – Rp10, 000.00) Idr10,000.00 x 100%
So, price elasticity in the bakery is :
Price elasticity= -20÷50 = -0,4
From the example above, you know that price elasticity of demand (price elasticity of demand) in the bakery is -0.4.
That is, it is important to underline that a negative sign in the results of the above calculations does not always mean that the price is inelastic.
Types Of Price Elasticity Of Demand
Type price elasticity there are basically five, such as the following:
1. Perfect Elastic Price
When a small change in the price of a product causes a large change in its demand, it is said to be perfectly elastic demand.
In the case of perfectly elastic prices, a small increase in prices leads to a decrease in demand to zero.
Meanwhile, a decrease in prices can lead to an increase in demand to Infinity.
In such cases, the demand is perfectly elastic or infinity with coefficients❸.
The degree of elasticity of demand helps in determining the shape and slope of the demand curve.
The flatter the slope of the demand curve, the higher the elasticity of demand.
In this type of elasticity, the demand curve is represented as a horizontal straight line.
However, you need to remember that this type of elasticity is a theoretical concept and difficult to apply in real situations.
However, it can be applied in cases, such as perfectly competitive markets and product homogeneity.
In such cases, the demand for an organization’s products is assumed to be perfectly elastic.
From the point of view of a business experiencing a situation of very elastic demand, a business can sell as much as possible, since consumers are ready to buy products in large quantities.
However, a slight increase in prices can stop demand.
2. Perfect Inelastic Price
A type of perfect inelastic elasticity is demand when there is no change in demand for a product with a change in its price.
The numerical value for a perfectly inelastic request is zero.
In the case of perfect inelastic, the demand curve is represented as a straight vertical line.
For example, in the case of the sale of essential goods, such as rice, demand tends not to change due to price changes.
Therefore, the demand for basic goods is usually perfectly inelastic.
3. Elastic Price
This type of elasticity refers to demand when the proportional change in demand is greater than the proportional change in the price of a product.
Its numerical value ranges from one to Infinity.
For example, if the price of a product rises 20% and the demand for that product falls 25%, then the demand will be relatively elastic.
For its curvaceous shape, price elasticity it has a gradually sloping shape.
For example, the price of a certain brand of cold drink rose from R8, 000.00 to Rp9, 000.00.
In such cases, consumers can switch to other brands of cold drinks.
However, some consumers still consume the same brand.
Therefore, a small change in price results in a larger change in the demand for the product.
4. Inelastic Price
Type price elasticity the inelastic is when the percentage change in demand is less than the percentage change in the price of a product.
For example, if the price of a product rises by 30% and the demand for that product falls by only 10%, then that demand is relatively inelastic.
The numerical value of relatively elastic demand ranges from zero to one (ep<1).
Relatively inelastic prices have practical applications, as the demand for many products usually changes as there is a change in price.
For example type price elasticity of demand you can see this in the example of bakery sales illustrated above.
From the calculation results, the numerical value is 0.4. So, you can conclude that the price elasticity in the bakery is the type that is not elastic.
5. Unitary Price Elasticity
When a proportional change in demand results in an equal change in the price of a product, demand is referred to as unitary elasticity.
The numerical value for unitary elastic demand is equal to one (ep=1).
For example, a product has increased in price from Rp20, 000 to Rp30, 000.00. With the initial price, the store could sell an average of 50 products a day.
And since there was an increase in prices, sales have dropped to 25 products per day.
So, its price elasticity = ((Final amount-initial amount) Initial amount x 100%(Final price-initial price) Initial price x 100%)
= (25 – 5050 x 100%) ⑴ (Rp30, 000.00 – Rp20, 000.00) Idr20,000.00 x 100%)
= -0,5 ÷ 0,5 = -1
In that case, you can see that a change in the price of the product produces the same change in demand.
Do You Know More About Price Elasticity?
Thus the explanation of price elasticity, ranging from understanding, types, to price elasticity of demand formula along with examples.
In essence, price elasticity is an important element to help analyze your business.
By counting price elasticity products, it will be easier for you to know the indication of how price changes will impact on business profits.