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Price elasticity of demand (PED)


Price elasticity of demand (PED)

A measure of the resposniveness of the demand for a product to changes in its own price.

PED - formula

Price elasticity of demand is calculated and defined as:

Where Qd = Quantity demanded
and P = Price

The % change in quantity demanded is divided by the % change in price.

Some students find it difficult to remember which way up this equation is. The following 'aide memoire' may be of use. You usually put your dinner (demand) on your plate (price). Demand is over price, D over P!

Price elasticity is negative because price and quantity demanded usually vary inversely with each other. This is so common that the sign is ignored. Do not forget, when price increases, demand falls and vice versa. If necessary, go back and review the section relating to the law of demand.