Managerial Economics & Pricing Lab

Price Elasticity & Revenue Lab

Calculate price elasticity of demand (PED), arc elasticity, revenue-maximizing price, and marginal revenue.

Elasticity Model Revenue Optimum Economic Theory FAQ

Market Presets

Load calibrated elasticity curves.

Step 1: Baseline vs. Test Price & Demand

Price & Quantity Sensitivity Configuration

1. Baseline Scenario (P1, Q1)

$
Original price point and sales volume baseline.

2. Test Scenario (P2, Q2)

$
Observed or projected sales volume at the new test price.
Arc Elasticity (Ed)
-0.40
Inelastic (|Ed| < 1.0)
Test Total Revenue
$117,000
+$17,000 (+17.0%) vs baseline
Optimal Price (P*)
$100.00
Q* = 1,333 units
Maximum Potential Revenue
$133,333
+$16,333 revenue upside

Elasticity & Pricing Verdict

Price increases raise total revenue because demand drops by a smaller percentage.

Microeconomic Pricing Strategy

Understanding Price Elasticity

Price Elasticity of Demand (PED) dictates whether a company should increase prices, discount, or maintain standard rates.

  • Inelastic Demand ($|E_d| < 1$): Essential software, mission-critical B2B tooling, or strong brand moats allow price increases that directly expand total revenue and gross margin.
  • Elastic Demand ($|E_d| > 1$): Commoditized retail and competitive consumer goods experience severe churn when prices rise; revenue is maximized via volume expansion.
  • Unit Elasticity ($|E_d| = 1$): Marginal Revenue ($MR$) equals zero, representing the apex of the total revenue curve.

Explore tiered pricing in the Tiered Volume Discount Lab.

Pricing Formulas

Essential elasticity formulas

Midpoint Arc Ed = ((Q2 - Q1) ÷ ((Q1 + Q2) ÷ 2)) ÷ ((P2 - P1) ÷ ((P1 + P2) ÷ 2))

Linear Demand: Q = a - bP (where b = -ΔQ ÷ ΔP)

Marginal Revenue: MR = a - 2bP

Optimal Revenue Price P* = a ÷ 2b

Optimal Quantity Q* = a ÷ 2

Simulate product mix in the Sales Mix Break-Even Lab.

FAQ

Price elasticity questions

What is Price Elasticity of Demand (PED)?

Price Elasticity of Demand (PED) measures the percentage change in quantity demanded in response to a percentage change in price. It indicates how sensitive buyers are to price changes.

Why use the Midpoint Arc Elasticity formula?

The midpoint arc formula uses average price and quantity as denominators, giving the exact same elasticity value whether price increases from P1 to P2 or decreases from P2 to P1.

How does elasticity affect total business revenue?

If demand is inelastic (|Ed| < 1), raising price increases total revenue. If demand is elastic (|Ed| > 1), raising price reduces revenue. Revenue is maximized at unit elasticity (|Ed| = 1).

How do you calculate the revenue-maximizing price P*?

From a linear demand curve Q = a - bP, Marginal Revenue is MR = a - 2bP. Setting MR = 0 gives optimal price P* = a ÷ 2b and optimal quantity Q* = a ÷ 2.

Can I export price elasticity calculations to CSV?

Yes. You can export baseline and test prices, quantities, total revenues, arc elasticities, and optimal pricing outputs as a UTF-8 CSV spreadsheet with formula injection defense.

Is this tool certified pricing or microeconomic consulting advice?

No. This tool provides educational pricing simulations for business analysis without commercial revenue optimization or economic warranties.

Continue Exploring Pricing & Profit Tools

Explore our Pricing & Profit Hub, model wholesale price breaks in the Tiered Volume Discount Lab, calculate multi-product margins in the Sales Mix Lab, or explore unit economics in the Unit Economics Lab.