As we have learned, many economic topics have been obsolete for decades. Yet, some topics and concepts continue to stand the test of time and are therefore useful today. Price point elasticity is a hallmark subtopic of microeconomics that is also considered a serious sub-topical contender for the modern body of knowledge surrounding our study of a sustainable economy. The reason for the legitimacy is that it based upon the mathematical ratio of price and quantity demanded along the demand curve. This basic calculation is in actuality a simple ratio that is based upon the linear slope relationship of price and quantity demanded for a specific product or service. Results render quantitative decision support for price adjustments and their consequence. For every one percent increase in price, the price point elasticity tells you how much less quantity will be demanded as a percent. Conversely, for every one percentage decrease in price, price point elasticity tells you how much more quantity will be demanded, as a percent.
Results are percentage so further calculation is needed to determine if the price adjustment is justified by a loss or gain relative to leaving the price the same. For example, the price demand schedule below says that for every one percent change we will see a two percent negative change in quantity demanded. So if we change the price five percent, we will see a negative impact of ten percent less product sold. If our product sells for $40 and we increase it to $42 we will see a drop of 200 sold. If the scale of our schedule is in millions sold, we will see a decrease of 200 million sold. Do you think it is worth the trouble of changing the price? Why?
We may gain $4000 by increasing price but we will also may lose 200 sales and at the new price of 42 dollars so our estimated loss of $8400 will be far greater than the gain. Of course, these are estimates and real world pricing may be in pennies instead of dollars, especially in this price range and other factors must be considered such as substitutes, complements, changing trends, taste, obsolesce, incomes, and a series of demographic fluctuations that are representative of the population of customers. Nonetheless, isolating price and quantity is the first exercise when considering the demand for a product or service.