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• The law of demand states that as the price of a product increases, the quantity demanded will tend to fall. However, the responsiveness of change in the quantity demanded may vary depending on the customer’s degree of ability and willingness to pay.

• Price elasticity of demand (PED) measures the degree of responsiveness of the quantity demanded of a product following a change in its price.

• Price Inelastic

  • If a price change causes a really small change in the demand then its meant to be called Price Inelastic

    
    

  • Buyers are not highly responsive to changes in price. For example, if the price of rice increases slightly, it is unlikely to have a large effect on the demand for rice in countries like China, Vietnam and Thailand.

• Price Elastic

  • If there is a really high response in the change of price or demand then its meant to be called price elasticity

    
    

  • A small rise in the price of Pepsi Cola is likely to reduce its demand quite drastically as customers switch to buying rival brands such as Coca-Cola.

• Calculation Of Price Elasticity Of Demand

  • The Formulae for PED - Change in Quantity Demand of percentage / Change in Price

  • Also denoted as %Qd / %P

• Example Of PED

  • Assume the demand for football match tickets at $50 is 50,000 per week. If the football club raises its price to $60 per ticket and demand subsequently falls to 45,000 per week, what is the value of price elasticity of demand.

  • Answer - 45,000 - 50,000 / 50,000 into 100 = -10%

    
    

  • Price = 60-50 / 50 into 100 = 20%

  • -10% / 20% = 0.5 %

  • This was the change in PED