1.2.4 Price elasticity of Demand

• Price elasticity of demand (PED)

  Measures the responsiveness, sensitivity of demand to changes in price
• How PED works


  1. Percentage change in quantity demanded

  2. Percentage change in price
• PED is always a negative number due to the law of demand
• PED examples

  • Prices reduced by 10%, quantity demanded increased by 40% (PED = -4)
  • Prices increased by 20%, quantity demanded fell by 4% (PED = -0.2)
• Elastic PED


  Percentage change in quantity demanded is greater than percentage change in price
• Inelastic PED


  Percentage change in quantity demanded is smaller than percentage change in price
• Elastic PED


  • Increase prices, revenue falls
  • Reduce prices, revenue increases
• Inelastic PED


  • Increase prices, revenue increases
  • Reduce prices, revenue decreases
• Usefulness of knowing PED


  • Predict impact of price changes on quantity demanded and sales
  • Prepare staffing and inventory
  • Forecast cash flow and income more accurately
  • Determine pricing strategy for exports based on exchange rates
• Factors making demand more inelastic


  • Strong brand loyalty
  • Few rivals
  • Product is cheap compared to consumer income
  • Someone else is paying
  • Limited time to consider purchase
• Difficulties in calculating accurate PED
• • If businesses can determine the price elasticity of demand for their products, they can adjust their pricing strategy to maximise their revenue.