Price Elasticity of Demand (PED) in Excel

 

Background

Price elasticity of demand (PED) measures how quantity demanded responds to price changes, crucial for companies with pricing flexibility. Though pricing decisions often intimidate managers, strategic changes can boost profits. Alfred Marshall first detailed PED in 1890, with later historical reviews by Macgregor (1942). Economists use PED to compare consumer reactions across products, such as soft drinks versus fruits. Our example compares reactions across different populations. 

 

Dataset for Example

The attached data comes from a test at two supermarkets where pineapple prices varied from $2.49 to $3.99 in 10-cent increments, each tested for one week.

Sales quantities were adjusted for weekly store traffic to avoid bias. The supermarkets serve different income areas: one high-income, one low-income. We will analyze price elasticity, comparing results to previous studies on fruits (Durham & Eales, 2008) and income-based differences (Jones & Mustiful, 1996). XLSTAT’s price elasticity tool will be used to compute and display elasticities, selecting prices and demand (units sold).

 

Setting Up

Once XLSTAT is launched, select the Advanced Functions / Marketing Tools / PED menu.  

 

 

 

In the  General tab, select columns A, B and C in the Prices , Demand and Groups fields. Here, we choose to compute the arc elasticities. After clicking OK , a series of tables and charts are displayed.

Interpreting the Results

 

Price elasticity is generally lower for the low-income group than for the high-income group. For low-income consumers, elasticity decreases as price rises, while for high-income consumers, elasticity remains fairly constant. A t-test with an automatic F-test confirmed significant differences in both mean elasticity and variance between the two groups, supported by box plot visuals.