{"id":191,"date":"2026-05-04T10:46:48","date_gmt":"2026-05-04T14:46:48","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=191"},"modified":"2026-05-04T10:46:48","modified_gmt":"2026-05-04T14:46:48","slug":"using-elasticity-to-maximize-profit-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2026\/05\/04\/using-elasticity-to-maximize-profit-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"Using Elasticity to Maximize Profit\u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"<p>E<span data-contrast=\"auto\">lasticity measures how sensitive customers are to price changes. If a small price increase causes a large drop in sales, demand is elastic. If sales barely change, demand is inelastic.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Imagine you run a music studio\u00a0charging $120 per lesson with 9 clients, generating $1,080 in revenue. If\u00a0you raise the\u00a0price to $200 and only 5 clients remain, revenue becomes $1,000. Despite serving fewer clients,\u00a0your\u00a0studio nearly maintains its revenue while potentially reducing service costs. If the cost per client is $100, total costs drop from $900 to $500, and profit increases from $180 to $500.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">To calculate the price elasticity of demand,\u00a0divide\u00a0the percentage change in quantity demanded by the percentage change in price. Horowitz was\u00a0speaking with a business owner who asked how to calculate the percentage change in price. Was the $80 price increase in this example a 66.7% increase ($80\/$120) when comparing it to the original price, or a 40% increase ($80\/$200) when comparing it to the new price?\u00a0Horowitz responded that to find the percentage change, they should compare it to the original price. However, to avoid this confusion, economists\u00a0usually use the midpoint by taking the average of the $200 and $120, which is $160, so\u00a0the price increases by 50% ($80\/$160).\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">In this case, using the midpoint, the price\u00a0increased by 50%, while the number of clients dropped by 57.14%\u00a0((9-5)\/(9+5)\/2), resulting in an elasticity of approximately \u22121.14. Since the absolute value is greater than 1, demand is considered elastic, meaning customers are relatively responsive to price changes.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Elasticity\u00a0mainly\u00a0depends on how easily\u00a0your\u00a0customers can switch to alternatives. If your service is unique, demand may be less sensitive to price. But if substitutes are easy to find, even a small price hike could drive customers away.\u00a0These factors determine how much\u00a0quantity\u00a0demanded will fall when prices rise.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Your customers\u2019 income also matters. In the U.S., the top 20% of households earn over half of all income. That means a small segment of clients may be willing to pay\u00a0much\u00a0more if\u00a0you\u00a0offer something they value. Many businesses ask: What do my highest-paying clients want beyond the basics? Can I design premium services\u00a0to\u00a0meet those needs?<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The concept of\u00a0elasticity\u00a0helps firms make informed pricing and output decisions. Policymakers use it to\u00a0forecast future\u00a0tax revenues, the effects of\u00a0raising\u00a0minimum wages, and how innovations in production affect profits in various industries.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Elasticity measures how sensitive customers are to price changes. If a small price increase causes a large drop in sales, demand is elastic. If sales barely change, demand is inelastic.\u00a0\u00a0 Imagine you run a music studio\u00a0charging $120 per lesson with 9 clients, generating $1,080 in revenue. If\u00a0you raise the\u00a0price to $200 and only 5 clients [&hellip;]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[488,462],"tags":[1701,1232,1702,1703,1700,1698,1384,1699,1492],"class_list":["post-191","post","type-post","status-publish","format-standard","hentry","category-business","category-microeconomics","tag-business-economics","tag-consumer-behavior","tag-demand-elasticity","tag-marginal-analysis","tag-midpoint-formula","tag-price-elasticity-of-demand","tag-pricing-strategy","tag-profit-maximization","tag-revenue"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Using Elasticity to Maximize Profit\u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2026\/05\/04\/using-elasticity-to-maximize-profit-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Using Elasticity to Maximize Profit\u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Elasticity measures how sensitive customers are to price changes. 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