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1.2 Elasticities - Price Elasticity of Demand

Syllabus: Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve.

Definition: Price Elasticity of Demand is a measure of how much quantity demanded changes in response to a change in the good´s own price.

Syllabus: Calculate PED using the following equation.

PED= percentage change in quantity demanded
            percentage change in price

Syllabus: State that the PED value is treated as if it were positive although its mathematical value is usually negative.

When the formulas is calculated the answer will involve a sign and a number. Since the Law of Demand says there is a negative relationship between price and quantity demanded the sign will always be negative (minus sign). So by convention economists tend to use only the absolute number when referring to PED (ie sign is ignored).

Syllabus: Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.

Helpful Stuff

PED - formula

Price elasticity of demand is calculated 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.