2.7.1 Calculation & Determinants of PED | CIE IGCSE Economics Revision Notes 2020

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

$PED = \frac{% change in quantity demanded}{% change in price} = \frac{% △ in QD}{% △ in P}$

$% Change = \frac{new value - old value}{old value} \times 100$

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

$% △ QD = \frac{40 - 100}{100} \times 100 % △ QD = - 60 %$

Step 2: Calculate the % change in P

$% △ P = \frac{15 - 10}{10} x 100 % △ P = 50 %$

Step 3: Insert the above values in the PED formula

$PED = \frac{% △ in QD}{% △ in P} PED = \frac{- 60}{50} PED = - 1.2$

The PED value will always be negative so economists ignore the sign and present the answer as 1.2

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)

Some products are more responsive to changes in prices than other products
The factors that determine the responsiveness are called the determinants of PED & include:
- Availability of substitutes: good availability of substitutes results in a higher value of PED (relatively elastic)
- Addictiveness of the product: addictiveness turns products into necessities resulting in a low value of PED (relatively inelastic)
- Price of product as a proportion of income: the lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)
- Time period: In the short term, consumers are less responsive to price increases resulting in a low value of PED (relatively inelastic). Over a longer time period consumers may feel the price increase more and will then look for substitutes resulting in a higher value of PED (relatively elastic)