2.2a PED

• Price Elasticity of Demand (PED)


  Measures the responsiveness of the quantity demanded of a good or service to a change in its price
• Price elastic demand


  When demand is very responsive to a change in price
• Price inelastic demand


  When demand is not very responsive to a change in price
• Calculating PED


  1. Percentage change in quantity = (Q2 - Q1) / Q1

  2. Percentage change in price = (P2 - P1) / P1

  3. Where P1 and Q1 are the original price and quantity, and P2 and Q2 are the new price and quantity
• Saucepans


  • Q1 = 400, Q2 = 300, % change in Q = -25%
  • P1 = £20, P2 = £24, % change in P = 20%
  • Therefore, PED = -1.25
• Coffee cups


  • Q1 = 1000, Q2 = 1500, % change in Q =
  • P1 = £5, P2 = £4, % change in P =
  • Therefore, PED = -2.5
• Rugs


  • Q1 = 100, Q2 = 70, % change in Q = -30%
  • P1 = £100, P2 = £200, % change in P = 100%
  • Therefore, PED = -0.3
• Milk bottles


  • Q1 = 70, Q2 = 65, % change in Q = -(50/7)%
  • P1 = £1, P2 = £1.50, % change in P = 50%
  • Therefore, PED = -(50/7)/50 = -(1/7) = -0.143
• Soda bottles


  • Q1 = 70, Q2 = 30, % change in Q = -(400/7)%
  • P1 = £1, P2 = £1.50, % change in P = 50%
  • Therefore, PED = -(400/7)/50 = -1.143
• Perfectly inelastic demand


  A change in price will have no effect on quantity demanded
• Perfectly elastic demand


  A change in price will cause an infinite change in the quantity demanded
• Inelastic demand


  The % change in quantity demanded is less than the % change in price (i.e. demand is not very responsive to changes in price)
• Unitary demand


  The % change in quantity demanded equals the % change in price
• Elastic demand


  The % change in quantity demanded is more than the % change in price (i.e. demand is very responsive to changes in price)
• If a firm increases the price, the quantity demanded goes down
• When demand is inelastic, price and revenue move in the same direction
• When demand is elastic, price and revenue move in opposite directions
• If demand is inelastic, governments may choose to tax this product as they know they will receive significant tax revenue
• Consumers may be more responsive to changes in price at different times or in different places, and prices may reflect this
• PED for a product may be different at different times of the year
• Factors that affect the elasticity of demand


  • Availability of substitutes
  • Necessities tend to have inelastic demand
  • When spending on a good accounts for a low percentage of income, its demand is likely to be inelastic
  • Price elasticity of demand for a particular good is likely to increase over time as people adjust their habits and new alternatives become available
• Elasticity of Demand


  Micro Topic 2.3
• Whether a price rise will benefit a producer by creating more revenue


  Depends on the price elasticity of demand
• When demand is inelastic


  Price and revenue move in the same direction
• A rise in price

  Causes an increase in revenue
• A fall in price

  Causes a decrease in revenue
• When demand is elastic

  Price and revenue move in opposite directions
• A rise in price

  Causes a decrease in revenue
• A fall in price

  Causes a rise in revenue
• If demand is inelastic


  Governments may choose to tax this product as they know they will receive significant tax revenue
• Consumers may be more responsive to changes in price at different times or in different places, and prices may reflect this
• Consumers may be more responsive to changes in price


  • Peak train times
  • Buying items at the airport terminal
  • Buying items at motorway services
• PED for a product may be different at different times of the year
• PED for a product may be different at different times of the year


  • Coats in summer
  • Ice cream in winter