Calculation & Determinants of PED (Cambridge (CIE) O Level Economics)
Revision Note
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:
To calculate a % change, use the following formula:
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
(1 mark)
Step 2: Calculate the % change in P
(1 mark)
Step 3: Insert the above values in the PED formula
(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 |
|
Relatively inelastic Value = 0→1 |
|
Unitary elasticity Value = 1 |
|
Relatively elastic Value = 1→ ∞ |
|
Perfectly elastic Value = ∞ |
|
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 Tip
Use the acronym SPLAT to remind yourself of the five factors that influence the PED of a good or service
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