Price elasticity of demand
Measure responsiveness and distinguish the sign from the magnitude.
What you will learn
- Calculate PED from percentage changes.
- Interpret elastic and inelastic demand.
Elasticity compares relative changes
Price elasticity of demand is percentage change in quantity demanded divided by percentage change in price. Using percentages allows comparison across goods measured in different units.
For a typical downward-sloping demand relationship, the signed value is negative. Questions often request its magnitude. A magnitude above one is elastic; below one is inelastic; equal to one is unit elastic.
Explain, then qualify
Availability of substitutes, the share of income spent and time to adjust can affect responsiveness. These are explanatory factors, not guarantees that a particular numerical elasticity applies.
Along a demand curve, a price rise tends to reduce total revenue when demand is elastic and increase it when demand is inelastic. Apply this relationship with care for large discrete changes and specify the elasticity measure used.
Worked example
Price rises by 5% and quantity demanded falls by 15%. Calculate PED and interpret it.
Show the worked solution
- Use −15/5=−3 for the signed value.
- Its magnitude is 3.
- Quantity demanded changes proportionally more than price.
Answer PED=−3; magnitude 3, so demand is elastic
Common mistakes
- Do not divide raw quantity units by currency changes.
- If asked to ignore the sign, report the magnitude.
What can you explain now?
Quantity demanded falls 4% after a 10% price rise. Is demand elastic?
Compare with the explanation
No; its PED magnitude is 0.4
The quantity response is proportionally smaller than the price change.
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