## Formula to Calculate Elastic Demand

Elastic Demand Formula explains the change in the demand for the product based on the change in the price. If the price of a product comes down, then the demand automatically increases and vice versa. However, the sensitivity to price is not applicable to all products. If a product’s demand changes with a change in price, then the demand is said to be elastic.

When this ratio becomes more than one, that means the percentage change in quantity is more than the percentage change in price and that good/ service is having elastic demand.

**Demand Elasticity = Percentage Change in Demand/Percentage Change in Price**

- Let’s say initial quantity = Q1
- Final Quantity =Q2
- Initial Price = P1
- Final Price = P2

**Elasticity of Demand formula = ((Q2-Q1)/(Q1+Q2))/((P2-P1)/(P1+P2))**

If it is more than one, then it is a product is having an elastic demand.

### Steps to Calculate Demand Elasticity

Demand Elasticity can be determined by the following steps:

**Step 1:**Identify the initial price and initial quantity. Let’s say the initial price is P1 and the initial quantity is Q1. Then find out the final Quantity Q2 and final price P2.**Step 2:**Numerator is the percentage change in quantity. It can be found out by dividing the difference between Q1 and Q2 by the summation of Q1 and Q2.**Step 3:**The same way denominator is the percentage change in Price. It can be found out by dividing the difference between P1 and P2 by the summation of P1 and P2.**Step 4:**Finally divide the value which is coming out from Step 2 by value coming out in Step 3.**Step 5:**If the value is greater than 1, that means it is having elastic demand. Elasticity of Demand = ((Q2-Q1)/(Q1+Q2))/((P2-P1)/(P1+P2))

### Examples

#### Example #1

**Let us start with a simple example. One month before the price of Petrol was $2 per liter and each day the total demand for a petrol pump is 40,000 liters. Now suddenly price has changed from $2 to $3 per liter and because of that demand reduced to 15,000 liters. So, we need to know whether petrol in that area has an elastic demand or not.**

- Here Q1 = 40,000
- P1 = $2
- Q2 = 15,000
- P2 = $3

Therefore, calculation of elastic demand using the above-given information is as follows,

= ((Q2-Q1)/(Q1+Q2))/((P2-P1)/(P1+P2))

= (15000-40000)/40000+15000)/((3-2)/(2+3))

= -25000/55000/1/5

** Elastic Demand will be –**

We ignore negative sign for this since demand will increase in the price will decrease so negative sign will come. Here Elasticity of Demand is greater than 1 hence it is an example of Elasticity of Demand.

#### Example #2

**Let’s say company XYZ which is a semiconductor company is thinking of increasing the price of its high selling chip. Currently, the price per chip is $50 while the demand is 10,000 chips per month. The company is thinking of increasing the price to $60 and after some market research, it came to know that because of price increase many customers will move to rival products and demand will decrease to 7,000 per unit. Based on these company wants to know whether this chip is having elastic demand or not. For that below will be calculation:**

- Here Q1 = 10,000 chips
- P1 = $50
- Q2 = 7,000
- P2 = $60

Therefore, calculation of elastic demand using the above-given information is as follows,

= ((Q2-Q1)/(Q1+Q2))/((P2-P1)/(P1+P2))

= (7000-10000)/ (10000+7000)/((60-50)/(50+60))

= -3000/17000/10/110

**Elastic Demand will be –**

We ignore negative sign for this since demand will increase in the price will decrease so negative sign will come. So, Elasticity of Demand is greater than 1 hence it is an example of Elasticity of Demand. Since it is elastic demand hence the company will have to think twice before increasing the price of the chip.

#### Example #3

**Microsoft is a US multinational company that develops and sells much software such as MS Office, which is very popular among individuals and companies. Let’s say Microsoft is currently licensing its MS Office at $100 per unit, and per month users are 100,000. **

**Because of its popularity CFO now wants to increase its price to $130 per unit and wants to evaluate whether it is having elastic demand or not. By doing market research, teams conclude that after increasing the price demand has reduced to 90,000 per month users. So now CFO wants to know whether it should increase the price or not. For that elastic demand calculation will be below:**

- Here Q1 = 100,000
- P1 = $100
- Q2 = 90,000
- P2 = $130

Therefore, calculation of elastic demand using the above-given information is as follows,

= ((Q2-Q1)/(Q1+Q2))/((P2-P1)/(P1+P2))

= (90000-100000)/ (100000+90000)/((130-100)/(100+130))

= -10000/190000/30/230

**Elastic Demand will be –**

So, it is less than 1 hence MS Office is not having Elastic Demand. That means CFO can afford to increase the price of MS Office.

### Relevance and Uses

It is very important for companies to understand the elastic demand concept. Based on this they can take important decisions regarding their pricing policy of products.

If a product is an inelastic demand that means, there are easy substitutes available in the market. That’s why the company should think twice before increasing the price of these products since this will majorly impact the demand for the product.

On the other hand, if the product is having inelastic demand that means the company can afford to increase the price of the product since this will not affect much of the volume that it is selling. So the total sales revenue will increase.

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