Price Elasticity of Demand

(PED)
Unit 3 - Lesson 1
Learning outcomes:
● Define all terms in orange bold (AO1)
● Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)
● Identify the various degrees and range of values for PED (AO2)
● Draw diagrams showing the range of values for PED including (AO4):
○ Relatively elastic and inelastic demand
○ Constant values for perfectly elastic demand, perfectly inelastic demand
and unitary PED
● Explain and illustrate in a diagram changing PED along a downward sloping
demand curve. (AO2) (AO4)
● Analyse the determinants of PED. (AO2)
Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

Law of Demand:

Inverse relationship between the price and quantity demanded of a good.

Price Elasticity of Demand (PED)

Measures the responsiveness of consumers to a change in price.

Helps us understand how sensitive consumers are to a change in price.

If price increases, how much will the quantity demanded decrease.

Knowing the Price Elasticity of Demand helps us understand how a change in

price will impact the quantity demanded by a consumer.
Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

To calculate the price elasticity of

demand:

% change in Quantity Demanded

divided by the % change in Price

Since we know there is a To calculate percentage change.

negative/indirect relationship between
price and quantity demanded, your New Number - Old Number
answer will always be a negative. ------------------------------------ X 100
Old Number
If you calculate and get a positive
number be sure to check your work!!
Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

Consumers purchase 6,000 TV’s when the price is $255 per unit, and buy 5,000 TV’s
when the price is $300. Calculate the PED for TV’s.

1. Calculate the percentage change in Quantity Demanded (Qd) of TV’s.

Qd changed from 5,000 (old number) TV’s to 6,000 (new number) TV’s.

New Number - Old Number 6,000 - 5,000 1,000

% Change = ------------------------------------ X 100 = ------------------ = --------- = - .2 x 100 = 20%
Old Number 5,000 5,000

The percentage change in Quantity Demanded of TV’s is 20%

When the price of TV’s from $300 per unit to $255 the Qd increased by 20%
Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

Consumers purchase 6,000 TV’s when the price is $255 per unit, and buy 5,000
TV’s when the price is $300. Calculate the PED for TV’s.

Next, calculate the percentage change in Price of TV’s.

New Number - Old Number 255 - 300 - 45

% Change = ------------------------------------ X 100 = -------------- = --------- = .15 x 100 = - 15%
Old Number 300 300

The percentage change in Price of TV’s is - 15%

Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

Consumers purchase 6,000 TV’s when the price is $255 per unit, and buy 5,000
TV’s when the price is $300. Calculate the PED for TV’s.

Now that you have the percentage change for both price and quantity
demanded you can now use the formula to calculate the price elasticity of
demand (PED).

Percentage change in price is - 15%

Percentage change in quantity demanded is 20%

% change in quantity 20%

PED = ------------------------------ = ------------- = - 1.33 = ABSOLUTE = PED = 1.33
% change in price - 15% VALUE
Use the formula for PED to calculate PED, changes in price, changes in
quantity and total revenue. (AO4)

Consumers purchase 6,000 TV’s when the price is $255 per unit, and buy 5,000
TV’s when the price is $300. Calculate the PED for TV’s.

Interpreting the value of PED:

PED = 1.33

For a 1% decrease in price the Quantity Demanded will increase by 1.33%.

Identify the various degrees and range of values for PED (AO2)

Ranges of Values for Price Elasticity of

Demand

● 0 < PED < 1

○ Inelastic Demand or Price Inelastic
Demand
○ % change in Price > % change in
Quantity Demanded
○ Quantity Demanded is relatively less
responsive to a change in price
○ The closer the number is to 0, the less A 10% increase in price (P1 - P2) leads to
a 5% decrease in Qd (Q1 - Q2)
responsive the consumer is to a change in
price. % increase P (10%) > % decrease Qd (5%)
Identify the various degrees and range of values for PED (AO2)

Ranges of Values for Price Elasticity of

Demand

● PED > 1
○ Elastic Demand or Price elastic
Demand
○ % change in Price < % change in
Quantity Demanded
○ Quantity Demanded is relatively
more responsive to a change in
price A 5% increase in price (P1 - P2) leads to a
10% decrease in Qd (Q1 - Q2)
○ The larger the number, the more
responsive the consumer is to a % increase P (5%) > % decrease Qd (10%)
change in price.
Identify the various degrees and range of values for PED (AO2)

Special Cases:

● PED = 1
○ Unit elastic
○ % change in Price = % change in
Quantity Demanded
○ Graph to the right
■ A 5% increase in Price (P1 - P2)
results in a 5% decrease in Qd
(Q1 - Q2)
Identify the various degrees and range of values for PED (AO2)

Special Cases

● PED = 0
● Perfectly Inelastic Demand
● There is no change in Quantity
Demanded if the Price changes.
● Quantity Demanded is unresponsive
to a change in Price
Identify the various degrees and range of values for PED (AO2)

Special Cases

● PED = Infinity
● A change in Price results in an infinite
change in the Quantity Demanded

In general, the larger the number the more responsive the consumer is to
a change in price.

The smaller the number the less responsive the consumer is to a change
in price.
Identify the various degrees and range of values for PED (AO2)
Explain and illustrate in a diagram changing PED along a downward sloping
demand curve. (AO2) (AO4)

Since PED is calculated using percentage

changes, PED will vary along the Demand
Curve.

For this reason the following holds:

● At low price and high quantities the %

change in Price is > % change in Qd
○ Therefore PED is inelastic
● At high prices and low quantities the %
change in Price < % change in Qd.
○ Therefore PED is elastic
Explain and illustrate in a diagram changing PED along a downward
sloping demand curve. (AO2) (AO4)

As price increase the percentage change

in price becomes smaller and smaller.

As the quantity demanded decreases the

percentage change in quantity demanded
becomes larger.

Given the formula for PED = % change in

Qd divided by the % change in price

As we move up and to the left along the

demand curve, PED becomes more
elastic.
Analyse the determinants of PED. (AO2)

The determinants of PED can be remembered using the following acronym:

S.P.L.A.T.

S: substitutes - number of and closeness of substitutes

P: proportion of income
L: luxury vs. necessity
A: addictiveness
T: time
Analyse the determinants of PED. (AO2)

S: Number and closeness of substitutes

Larger the number and closeness of substitutes

● The more responsive a consumer is to a change in price.

● The more elastic the demand for the good.
○ Example: Toothpaste has a large number of substitutes (brands). An increase in the price of one
brand, other brands prices remain constant, will lead consumers to switch to another brand
resulting in a decrease in Qd for the toothpaste brand that increased price.

Small number of unrelated substitute goods

● The less responsive a consumer is to a change in price.

● The more inelastic the demand for the good.
Analyse the determinants of PED. (AO2)

P: Proportion of Income
The larger the proportion of income a purchase requires from a consumer

● The more sensitive the consumer is to a change in price.

● Demand is more elastic

○ Example: the purchase of a car takes up a large proportion of a consumer’s income. If the
price were to increase by 30%, consumers would be more responsive to the change.

The smaller the proportion of income a purchase requires for a consumer

● The less sensitive the consumer is to a change in price.

● Demand is more inelastic.
Analyse the determinants of PED. (AO2)

L: Luxury vs. Necessity

Luxury goods are good that a consumer wants.

● The more sensitive a consumer is to a change in price

● Price elastic demand
● % change in price is less than the % change in quantity demanded

Necessities are goods that consumers need. For example water.

● The less sensitive a consumer is to a change in price

● Price inelastic demand
● % change in price is greater than the % change in quantity demanded
Analyse the determinants of PED. (AO2)

A: Degree of Addictiveness
The greater the degree of addictiveness a consumer has for a good

● The less sensitive a consumer is to a change in price

● Price inelastic demand
● % change in price is greater than the % change in quantity demanded

The less addictive a good is for a consumer

● The more sensitive a consumer is to a change in price

● Price elastic demand
● % change in price is less than the % change in quantity demanded
Analyse the determinants of PED. (AO2)

T: Amount of Time
The shorter the amount of time a consumer has to react after a change in price

● The less sensitive a consumer is to a change in price

● Price inelastic demand
● % change in price is greater than the % change in quantity demanded

The longer the amount of time a consumer has to react after a change in price

● The more sensitive a consumer is to a change in price

● Price elastic demand
● % change in price is less than the % change in quantity demanded