2.2.1 Price elasticity of demand (PED)

What is price elasticity of demand (PED)?

The responsiveness of quantity demanded to a change in price.

How is PED calculated?

PED = % change in quantity demanded ÷ % change in price.

What is a price elastic good?

Demand changes more than the price change; PED > 1.

What is a price inelastic good?

Demand changes less than the price change; PED < 1.

What is a unitary elastic good?

Demand changes exactly the same as the price change; PED = 1.

What is a perfectly inelastic good?

Demand does not change at all when price changes; PED = 0.

What is a perfectly elastic good?

Demand falls to zero when price changes; PED = ∞.

Example: Bread price increases 20%, demand falls 15%. PED?

PED = -15 ÷ 20 = -0.75 → demand is price inelastic.

Factor influencing PED: Necessity

Necessary goods (bread, electricity) are more inelastic; luxury goods are more elastic.

Factor influencing PED: Substitutes

More substitutes → more elastic demand; fewer substitutes → more inelastic.

Factor influencing PED: Addiction/habit

Goods like cigarettes are inelastic because consumers continue buying.

Factor influencing PED: Proportion of income

Small expense → inelastic; large expense → elastic.

Factor influencing PED: Durability of good

Durable goods (washing machines) → more elastic; non-durable → more inelastic.

Factor influencing PED: Peak/off-peak demand

Peak demand (trains 9am–5pm) → inelastic; off-peak → more elastic.

How does PED affect total revenue?

Inelastic demand → raising price increases TR; Elastic demand → raising price decreases TR.