What is Price Elasticity of Demand?
Price elasticity of demand (PED) measures how sensitive buyers are to price changes — it shows the percentage change in quantity demanded for every 1% change in price.
Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price: PED = (%@Delta Qd) / (%@Delta P).
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Step-by-step worked examples
A pizza place drops price from $10 to $8 (20% decrease). Quantity demanded rises from 100 to 150 slices (50% increase). What is PED?
% change in Qd = (150-100)/100 × 100 = 50% % change in P = (8-10)/10 × 100 = -20% PED = 50% / |-20%| = 50 / 20 = 2.5 (elastic)
A medicine price rises from $5 to $6 (20% increase). Quantity demanded drops from 1000 to 980 units (2% decrease). Calculate PED.
% change in Qd = (980-1000)/1000 × 100 = -2% % change in P = (6-5)/5 × 100 = 20% PED = |-2%| / 20% = 2 / 20 = 0.1 (inelastic)
Concert tickets rise from $50 to $60 (20% hike). Demand drops from 5000 to 4000 tickets (20% fall). What is PED and what type?
% change in Qd = (4000-5000)/5000 × 100 = -20% % change in P = (60-50)/50 × 100 = 20% PED = |-20%| / 20% = 20 / 20 = 1.0 (unit elastic)
Flashcards
Quick quiz
Q1.Price drops 10%, quantity demanded rises 30%. What is PED?
Q2.PED = 0.5 for a good. If price rises 10%, quantity demanded:
Q3.Which good likely has the highest PED?
Q4.If demand is perfectly inelastic (PED = 0):
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Common mistakes
Using absolute quantities instead of percentages. — Correct: PED must use % changes, not raw units. Percentage change normalizes the scale.
Confusing PED with slope of demand curve. — Correct: Slope is ΔQ/ΔP (units). PED is (%ΔQ) / (%ΔP) (unitless, comparable across goods).
Assuming all price increases reduce revenue. — Correct: If demand is inelastic, price rise can increase revenue (less quantity, but much higher price).
Forgetting to take absolute value of PED. — Correct:
FAQ
What is price elasticity of demand?
PED measures the responsiveness of quantity demanded to price changes. It is the % change in quantity demanded divided by the % change in price.
Why is PED important?
Businesses use PED to decide pricing strategy. If demand is elastic, raising price loses too many customers. If inelastic, price rises boost profit.
How do you calculate PED?
PED = (% change in Qd) / (% change in P). For example, if price rises 10% and quantity drops 20%, PED = 20% / 10% = 2 (elastic).
What factors affect elasticity?
Availability of substitutes, necessity vs. luxury, share of budget, time horizon. More substitutes and luxuries = more elastic.