Demand Elasticities and Volume Effects: Practical Formulas for Practitioners

To calculate the volume effects of price changes—for example, in cartel damages cases or under a total welfare standard—economic practitioners frequently resort to the simple and well-known “elasticity times percentage price change” formula or some variant thereof. Doing so introduces implicit assumptions about demand that may be either difficult to verify or inconsistent with other parts of the analysis. The same issues arise when percentage volume effects are divided by percentage price changes to estimate demand elasticities. To address this, the present article derives practical formulas for calculating volume effects using elasticities as well as for calculating elasticities using volume effects for a range of cases for both linear and isoelastic demands. When the true shape of the demand curve is unknown, these formulas can be used to construct ranges analogous to the ranges frequently used in other contexts such as the calculation of cost pass-through rates or merger simulation.