Price Elasticity of Demand Formula

313 Words Feb 5th, 2018 1 Page
There are three kinds of elasticity. There is elastic demand, where the elasticity is over 1. There is unitary elastic, where it is at 1.0. There is inelastic demand, where the elasticity is under 1 (Investopedia, 2013).
Because the paint is at 2.56, this is considered to be elastic demand. This means that the demand for the good changes at a faster rate than the price change of the good. Sales fall off steeply when the price increases, but they jump sharply when the price declines.
This is important for the company to know the elasticity, because that can help it set the price. Where the price is elastic, the optimal price can be calculated based on how much it costs to manufacture the paint. The best use of this type of data is to find the optimal profit point.
For example, if the cost to make the paint is $2.75, the profit at $3 would be:
(3 2.75) * 35 = $8.75
But if the price is $3.50, the profit is:
(3.5 2.75) * 20 = $15
So even though demand is elastic, the estimated contribution of the paint is higher with the higher price. This use in price setting is one of the best uses for elasticity information,…