# Elasticity of Demand

TheĀ Price Elasticity of Demand is a calculation used to show the responsiveness of the Quantity demanded given a change in Product Price. Similar calculations can show the Price Elasticity of Revenue and the Price Elasticity of Profit.

The Price Elasticity of Demand is calculated as the ratio of the percentage change in Quantity to the percentage change in Price. If the Price of a different Product is being changed, then the calculation can be referred to as the “Cross Price Elasticity of Demand”.

This example workflow follows a step-by-step method to manually calculate the Price Elasticity of Demand from the Demand Curve results generated by the Profit Engine node. This is not the recommended approach. Instead, configure the Price Sensitivity node to calculate the impact of a Price Change to Quantity, Revenue, and Profit.

This Building Blocks example assumes you have already downloaded the open-source KNIME analytics platform and installed the free Market Simulation (Community Edition) plugin. If not, start by returning to Getting Started.

# Competitive Story

This is workflow simulates a very simple duopoly Market. Spacely Sprockets and Cogswell Cogs sell very similar Products at the same Price and Marginal Cost. Customers have the same average Willingness To Pay (WTP) for these Products. Spacely Sprockets now wants to calculate the Price Elasticity of his Sprockets should he change Price.

# Demand Curve

The Profit Engine node calculates all the points along a Demand Curve should the selected Focus Product change Price. The results from this Demand Curve are used to calculate Price Elasticity.

## Define Market

Spacely Sprockets and Cogswell Cogs sell very similar Products.

## Profit Engine

The Profit Engine node calculates Demand at 41 Price Points.

## Demand Curve

The Demand Curve results predict changing Demand +/- Current Price

## Demand Curve Chart

Quantity and Profit curves from the predicted Demand Curve results.

# Extract +/- Current Price

The Price Elasticity calculation uses the middle three Price Points from the Demand Curve results:

1. Left of the Current Price
2. Current Price
3. Right of the Current Price

The Quantity / Revenue / Profit results from all three of these points are renamed and moved into a single row.

## Select Prices

The middle three Prices are selected from the Demand Curve results.

## Rename Columns

The qualifiers ‘Left’ and ‘Right’ are added to the outside Prices.

## Single Row

Demand at the Current Price / Left Price / Right Price is collected.

# Calculate Elasticity

The calculated results for this workflow are:

• Price Elasticity of Quantity = -3.446
• Price Elasticity of Revenue = -2.44
• Price Elasticity of Profit = -1.722

The Price Elasticity calculation is:

## Math Formula

Calculate Price Elasticity for Quantity / Revenue / Profit

## Results

Add the results to the end of the data row.