Price Elasticity of Demand (PED) (Edexcel IGCSE Economics)

Revision Note

Written by: Steve Vorster

Reviewed by: Jenna Quinn

The law of demand states that when there is an increase in price, there will be a fall in the 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

$PED = \frac{% change in quantity demanded}{% change in price} = \frac{% △ in QD}{% △ in P}$

$% Change = \frac{new value - old value}{old value} \times 100$

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

$% △ QD = \frac{40 - 100}{100} \times 100 % △ QD = - 60 %$

Step 2: Calculate the % change in P

$% △ P = \frac{15 - 10}{10} x 100 % △ P = 50 %$

Step 3: Insert the above values in the PED formula

$PED = \frac{% △ in QD}{% △ in P} PED = \frac{- 60}{50} PED = - 1.2$

Step 4: Final answer = 1.2
The PED value will always be negative so economists ignore the sign and present the answer as 1.2

When doing elasticity calculations, make sure that your final answer is not expressed as a percentage.

You may be asked to state the formula for PED

The Classification of PED Values

Value and Name	Explanation	Diagram
0 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)
0 →1 Relatively Inelastic	The %∆ in QD is less than proportional to the %∆ in P (e.g. addictive products)
1 Unitary Elasticity	The % ∆ in QD is exactly equal to the %∆ in P
1 → ∞ Relatively Elastic	The %∆ in QD is more than proportional to the %∆ in P (e.g. luxury products)
∞ Perfectly Elastic	The %∆ in QD will fall to zero with any %∆ in P (highly theoretical elasticity)