Calculation & Determinants of PED (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

The Definition and Calculation of PED

  • 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:

text PED =  end text fraction numerator percent sign space change space in space quantity space demanded over denominator percent sign space change space in space price end fraction space equals space fraction numerator percent sign triangle space in thin space QD over denominator percent sign triangle in space straight P end fraction 

  • To calculate a % change, use the following formula:

percent sign space Change space equals space fraction numerator new space value space minus space old space value over denominator old space value end fraction space cross times space 100 

Worked Example

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

  percent sign triangle QD space equals space fraction numerator 40 minus 100 over denominator 100 end fraction space cross times 100

percent sign triangle QD space equals space minus 60 percent sign (1 mark)


Step 2: Calculate the % change in P

percent sign triangle straight P space equals space fraction numerator 15 space minus space 10 over denominator 10 end fraction space straight x space 100

percent sign triangle straight P space equals space 50 percent sign (1 mark)


Step 3: Insert the above values in the PED formula

PED space equals space fraction numerator percent sign triangle space in thin space QD over denominator percent sign triangle in space straight P end fraction

PED space equals space fraction numerator negative space 60 over denominator space space space space 50 end fraction

PED space equals space minus 1.2
(2 marks)

The PED value will always be negative so economists ignore the sign and present the answer as 1.2

Interpreting PED values

The Meaning of Different PED Values

Name

Explanation

 Perfectly inelastic

Value = 0

2-7-1-calculation-and-determination-of-ped--perfectly-inelastic
  • The QD is completely unresponsive to a change in P (very theoretical value

    • E.g. A heart transplant is extremely inelastic but possibly not perfectly)

Relatively inelastic

Value = 0→1

2-7-1-calculation-and-determination-of-ped--relatively-inelastic
  • The %∆ in QD is less than proportional to the %∆ in P

    • E.g. Addictive products

Unitary elasticity

Value = 1

2-7-1-calculation-and-determination-of-ped---unitary-elasticity
  • The %∆ in QD is exactly equal to the %∆ in P

Relatively elastic

Value = 1→ ∞

2-7-1-calculation-and-determination-of-ped---relatively-elastic
  • The %∆ in QD is more than proportional to the %∆ in P

    • E.g. Luxury products

Perfectly elastic

Value = ∞

2-7-1-calculation-and-determination-of-ped---perfectly-elastic
  • The %∆ in QD will fall to zero with any %∆ in P (highly theoretical elasticity)

The Determinants of PED

  • Some products are more responsive to changes in prices than other products

  • The factors that determine responsiveness are called the determinants of PED and include:

    • S - Availability of substitutes
      Good availability of substitutes results in a higher value of PED (relatively elastic)

    • P - Price of product as a proportion of income
      The lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)

    • L - Luxury or necessity
      Luxury goods are more elastic because they are not essential, while necessities are more inelastic because consumers have no choice but to buy them.

    • A - Addictiveness of the product
      Addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic)

    • T - Time period
      In the short term, consumers are less responsive to price increases, resulting in a low value of PED (relatively inelastic). Over a longer period of time, consumers may feel the price increase more and will then look for substitutes, resulting in a higher value of PED (relatively elastic)

Examiner Tips and Tricks

Use the acronym SPLAT to remind yourself of the five factors that influence the PED of a good or service

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.