The price elasticity of demand (PED) for a good or service is a numerical value which shows us the relationship between the quantity demanded for a product and a change in its price.
Through calculating PED, we can see how responsive the quantity demanded for a good or service is to a change in price. We assume, given the law of demand, that an increase in price will lead to a decrease in quantity demanded. Through knowing the value of PED, we can see exactly how much quantity demanded will decrease.
If, following a change in price, the quantity demanded changes more than proportionately (PED > 1), the product is said to be price elastic. On the contrary, if the quantity demanded changes less than proportionately (PED < 1) it is said to be price inelastic.
PED is calculated using this formula:
% ∆ Quantity Demanded / % ∆ Price
Icons made by Freepic from www.flaticon.com
Key terms:
Perfectly elastic demand – the quantity demanded of a good or service changes infinitely at a fixed price level. If price was to either increase or decrease, quantity demanded would drop to zero.
Perfectly inelastic demand – the quantity demanded of a good or service remains fixed at all times, even if there is a change in price.