The Definition & Calculation of PED
- The law of demand states that when there is an increase in price, there will be a fall in quantity demanded
- Economists are interested by how much the quantity demanded will fall
- Price elasticity of demand reveals how responsive the change in quantity demanded is to a change in price
- The responsiveness is different for different types of products
- The responsiveness is different for different types of products
Calculation of PED
- PED can be calculated using the following formula
- To calculate a % change, use the following formula
Worked example
A firm raises the price of its products from £10 to £15. Its sales fall from 100 to 40 units per day. Calculate the PED of its products
Step 1: Calculate the % change in QD
Step 2: Calculate the % change in P
Step 3: Insert the above values in the PED formula
The PED value will always be negative so economists ignore the sign and present the answer as 1.2
Interpreting PED Values
The Size of PED Varies From 0 To Infinity (∞) & Is Classified As Follows
Value |
Name |
Explanation |
Diagram |
0 |
Perfectly Inelastic |
The QD is completely unresponsive to a change in P (very theoretical value e.g. heart transplant is extremely inelastic but possibly not perfectly) |
|
0→1 |
Relatively Inelastic |
The %∆ in QD is less than proportional to the %∆ in P (e.g. addictive products) |
|
1 |
Unitary Elasticity |
The %∆ in QD is exactly equal to the %∆ in P |
|
1→ ∞ |
Relatively Elastic |
The %∆ in QD is more than proportional to the %∆ in P (e.g. luxury products) |
|
∞ |
Perfectly Elastic |
The %∆ in QD will fall to zero with any %∆ in P (highly theoretical elasticity) |