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

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

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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

 

 Therefore PED =  -5 (Elastic)

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.

 

 

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