Price elasticity

Forecasting Product Demand in R

Aric LaBarr, Ph.D.

Senior Data Scientist, Elder Research

Price vs. Demand

Price elasticity is the economic measure of how much demand "reacts" to changes in price
As price changes, it is expected that demand changes as well, but how much?

$$ \text{Price Elasticity} = \frac {\% \text{Change in Demand}}{\% \text{Change in Price}} $$

Elastic vs. Inelastic

Elastic products have % changes in demand larger than the % change in price ($\text{Price Elasticity} > 1$)
Inelastic products have % changes in demand smaller than the % change in price ($\text{Price Elasticity} < 1$)
Unit elastic products have % changes in demand equal to the % change in price ($\text{Price Elasticity} = 1$)

Linear Regression

Price Elasticity Example

M_hi <- as.vector(bev_xts_train[,"M.hi"])

M_hi_p <- as.vector(bev_xts_train[,"M.hi.p"])

M_hi_train <- data.frame(log(M_hi), log(M_hi_p))

colnames(M_hi_train) <- c("log_sales", "log_price")

model_M_hi <- lm(log_sales ~ log_price, data = M_hi_train)

Coefficients:
(Intercept)  log_price  
     8.9907      -0.7138

Let's practice!

Forecasting Product Demand in R