ped

• 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


  • Price elasticity of demand for popcorn at the cinema is -0.8

  Current price of a box of popcorn is £5

  Calculate the percentage change in quantity demanded following a £1 increase in the price
• 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) / 20%
• Step 3: Rearrange and solve for the % change in quantity demanded

  % change in quantity demanded = PED x 20% = -0.8 x 20% = -16%
• 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)
• Steps to solve the worked example

  1. Step 1: Calculate the percentage change in price

  2. Step 2: Insert the data into the PED formula

  3. Step 3: Rearrange and solve for the percentage change in quantity demanded

  4. Step 4: Present the final answer
• The quantity demanded falls by 16% when the price increases
• If the price increases


  The quantity demanded decreases
• If the price decreases


  The quantity demanded increases
• 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)
• Examples of elastic and inelastic demand

  • Elastic: Luxury products (cars, smart watches, foreign holidays, cinema visits, jewellery, branded goods)
  • Inelastic: Necessities (bread, milk, eggs, potatoes, fuel, rent, toothpaste), Addictive products (cigarettes, sugary foods)
• The PED will always be negative indicating the inverse relationship between price and quantity demanded
• When interpreting PED, it is better to say "demand for the product is price elastic/inelastic" rather than "the product is elastic/inelastic"
• 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