Price Elasticity of Demand

Overview

Price elasticity measures the percentage change in quantity demanded for a 1% change in price. Ed = %ΔQ / %ΔP. |Ed| > 1 = elastic (price-sensitive), |Ed| < 1 = inelastic (price-insensitive). Critical for pricing decisions and revenue optimization.

When to Use

Trigger conditions:

• Estimating how a price change will affect unit sales and revenue
• Determining if demand is elastic or inelastic for a product
• Optimizing price for maximum revenue or profit

When NOT to use:

• When you need consumer willingness-to-pay distribution (use Van Westendorp or conjoint)
• When pricing multiple products together (use bundle pricing)

Algorithm