Imagine you own an electronics store, and you've been selling a popular smartphone model for $700. Now, you're contemplating increasing the price to $800, as you believe it offers premium features. However, you're curious about how this price increase might impact your sales and total revenue.
In this case, you're exploring the concept of price elasticity of demand for electronic devices. It measures how responsive consumers are to changes in the price of electronic products.
If the demand for this smartphone is highly elastic, a $100 price increase could lead to a significant decrease in sales, potentially resulting in lower overall revenue despite the higher price. This might occur if there are similar smartphones available at lower prices, making customers price-sensitive.
Conversely, if the demand for this smartphone is inelastic, the price hike might result in only a modest reduction in sales, and the increased revenue from the higher prices may offset the drop in the number of units sold. This could be the case if your smartphone offers unique features or if there's strong brand loyalty among your customers.
Midpoint formula for price elasticity of demand
The price elasticity of demand is almost always negative. It means that the relationship between price and demand is inversely proportional – the higher the price, the lower the demand, and vice versa.
You can also use this midpoint method calculator to find any of the values in the equation ( P0, P1, Q0 or Q1 ). Simply input all of the remaining variables, and the result will be calculated automatically.