Price elasticity of demand (PED)
Price elasticity of demand
- PED measures how much quantity demanded changes when the price changes.
$$\text{PED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}$$
- PED > 1 → elastic (quantity changes a lot — many substitutes, luxuries).
- PED < 1 → inelastic (changes little — needs like petrol, salt).
Practice
Quantity demanded falls 20% when price rises 10%. What is the size of the PED?
PED size = %ΔQ ÷ %ΔP = 20 ÷ 10 = 2 (elastic).
Practice
Which good is most likely to have inelastic demand?
Needs with few substitutes (petrol, salt) are inelastic; goods with many substitutes are elastic.
PED and total revenue
- Total revenue = price × quantity sold.
- demand inelastic: raising the price raises revenue (quantity falls only a little).
- demand elastic: raising the price lowers revenue (quantity falls a lot).
- So governments tax inelastic goods (cigarettes) to raise a lot of money.
Practice
If demand is inelastic and a firm raises its price, total revenue will:
With inelastic demand, quantity barely falls, so a higher price raises total revenue.
You've got it
Key idea
- PED = %ΔQ ÷ %ΔP; >1 elastic, <1 inelastic
- inelastic + price up → revenue up; elastic + price up → revenue down
- needs (few substitutes) are inelastic; luxuries are elastic