# Price Elasticity of Demand (PED) – AS/A LEVELS/IB/IAL

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

## Elasticity of Demand

### Price elasticity of demand

#### Definition

Price elasticity of demand (PED) measures the responsiveness of the demand for a good due to a change in its price. Price elasticity of demand (simple explanation)

Price elasticity of demand simply looks at how much the demand for a product changes when price changes. E.g. what would happen to the demand for a Sony PlayStation if price decreased by 50% from £400 to £200?

Calculation example of PED:

Sony PlayStation   ### Step 1 ### Step 2

Note: The reason why – 5 is elastic is due the reason that you do not take the (-) negative sign into consideration when deciding whether the product is elastic or inelastic.

### Types of price elasticity of demand

If PED > 1 = The goods are price elastic

This means that the percentage change in demand will be higher than the percentage change in price. For example a 50% decrease in price of a Sony PlayStation caused a 250% increase in the demand for the product.

If PED < 1 = The goods are price inelastic

This means that the percentage change in demand will be lower than the percentage change in price. For example a 30% decrease in the price of bread will cause a 10% increase in the demand for bread.

If PED is = 1 The goods are unit elastic

This is when the percentage change in demand is the same as the percentage change in price. A 20% decrease in the price of strawberries may cause a 20% increase in the demand for strawberries.

If PED is = 0 The goods are perfectly inelastic

This is when the change in price will not affect the demand for the product.

### PED Diagrams

#### Inelastic Demand ### The Relationship between PED and Total Revenue

• Elastic Demand – when demand is elastic, total revenue moves in the opposite direction
• Inelastic Demand – when demand is inelastic, total revenue moves in the same direction
• Unit Elastic Demand – when demand is unit elastic, the total revenue remains unchanged
• Perfectly Elastic Demand – when demand is perfectly elastic, total revenue falls to zero
• Perfectly Inelastic Demand – when demand is perfectly inelastic, total revenue moves in the same direction by the same proportion

### What are the determinants of price elasticity of demand?

1. Luxury goods – these have high PEDs as they are sensitive to price changes. If the price of a luxury good rises drastically, consumers are likely to stop purchasing it
2. Necessity goods – these have low PEDs as regardless of a price change, consumers will continue to purchase goods which are necessary to them. for e.g fruit / veg, medicine, toiletries
3. Availability of substitute goods – if a good has multiple substitutes available, the PED will be high – increases in price will cause consumers to want to switch to a cheaper alternative
4. Addictive/Habitual goods – habitual goods tend to have an inelastic demand and therefore the PED is likely to be low
5. Time period – the PED is directly proportional to the time period. The PED for a shorter time period is low, whereas for a longer time period it is high

Quick Fire Quiz – Knowledge Check

1. Define PED (2 marks)

2. State the formula for PED (2 marks)

3. Explain what the following suggest (4 marks)

• a) PED > 1
• b) PED <1
• c) PED = 1
• d) PED = Infinity

4. A local council raises the price of car parking from £3 per day to £5 per day and finds that usage of car parks contracts from 1,200 cars a day to 900 cars per day.
Calculate the price elasticity of demand for this price change and calculate whether total revenue from the car park rises or falls. (4 mark)

5. Draw a PED diagram showing the following (4 marks)

• Elastic
• Inelastic
• Perfectly elastic
• Perfectly inelastic
• Unit elastic

6. Explain the relationship between PED and Total Revenue (8 marks)

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