PED And Calculation Of PED - Chapter 2.7.1
The law of demand states that when there is an increase in price, there will be a fall in quantity demanded
Economists are interested by how much the quantity demanded will fall
Price elasticity of demand reveals how responsive the change in quantity demanded is to a change in price
The responsiveness is different for different types of products
Calculation of PED
PED can be calculated using the following formula
To calculate a % change, use the following formula
Example Of Calculating PED
A firm raises the price of its products from £10 to £15. Its sales fall from 100 to 40 units per day. Calculate the PED of its products
Step 1: Calculate the % change in QD
Step 2: Calculate the % change in P
Step 3: Insert the above values in the PED formula
The PED value will always be negative so economists ignore the sign and present the answer as 1.2
Interpreting PED Values
The Size of PED Varies From 0 To Infinity (∞) & Is Classified As Follows
PED Value - 0
Name - Perfectly Inelastic
The QD is completely unresponsive to a change in P (very theoretical value e.g. heart transplant is extremely inelastic but possibly not perfectly)
PED Value - 0→1
Name - Relatively Inelastic
The %∆ in QD is less than proportional to the %∆ in P (e.g. addictive products)
PED Value - 1
Name - Unitary Elasticity
The %∆ in QD is exactly equal to the %∆ in P
PED Value - 1→ ∞
Name - Relatively Elastic
The %∆ in QD is more than proportional to the %∆ in P (e.g. luxury products)
PED Value - ∞
Name - Perfectly Elastic
The %∆ in QD will fall to zero with any %∆ in P (highly theoretical elasticity)