Price elasticity of demand

• Price Elasticity of Demand (PED)

  Measure of how responsive the quantity demanded is to a change in price
• Increase in price

  Fall in the quantity demanded
• Fall in price

  Increase in the quantity demanded
• Price elasticity of demand


  Helps calculate how responsive the change in quantity demanded will be to a change in price
• The PED value is always negative
• Calculation of PED

  PED = % change in quantity demanded / % change in price
• To calculate a % change

  % change = (New value - Original value) / Original value x 100
• Worked example

  • The price elasticity of demand for popcorn at the cinema is -0.8. The current price of a box of popcorn is £5. Calculate the percentage change in quantity demanded following a £1 increase in the price of a box of popcorn.
• Step 1: Calculate the percentage change in price

  £5 - £1/£5 x 100 = 20%
• Step 2: Insert the data into the PED formula

  PED = % change in quantity demanded / % change in price
• Step 3: Rearrange and solve for x

  % change in quantity demanded = PED x % change in price
• Price elasticity of demand (PED)

  Measure of how responsive the change in quantity demanded will be to a change in price
• Calculation of PED

  Use the formula: PED = (% change in quantity demanded) / (% change in price)
• The quantity demanded falls by 16%
• If the price increases, the quantity demanded decreases
• Interpretation of PED numerical values

  • PED > 1: Elastic demand (more responsive to price changes)
  • PED between 0 and 1: Inelastic demand (less responsive to price changes)
• Factors influencing the price elasticity of demand

  • Brand loyalty
  • Availability of substitutes
  • Proportion of income taken up by the product
  • Whether the product is a luxury or necessity
  • Time period considered
• Significance of PED to businesses

  • If demand is price inelastic (PED < -1), raising price increases total revenue
  • If demand is price elastic (PED > -1), raising price decreases total revenue
• PED value

  Impact on total revenue when price increases or decreases