Price Elasticity of Demand (PED)

Definition

Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price. It is a crucial concept in economics as it helps to understand how consumers react to price fluctuations and how this affects businesses.

Formula

PED is calculated using the following formula:

$$PED = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}}$$

Interpreting PED Values

The calculated PED value indicates the degree of responsiveness. Here's a breakdown of common PED categories:

• Elastic Demand (PED > 1): A significant change in quantity demanded results from a small change in price. Consumers are very sensitive to price changes.
• Inelastic Demand (PED < 1): A small change in quantity demanded results from a large change in price. Consumers are not very sensitive to price changes.
• Unit Elastic Demand (PED = 1): The percentage change in quantity demanded is equal to the percentage change in price.
• Perfectly Elastic Demand (PED = ∞): Any increase in price will lead to zero quantity demanded.
• Perfectly Inelastic Demand (PED = 0): Changes in price have no effect on the quantity demanded.

Factors Affecting PED

Several factors influence the price elasticity of demand for a product:

• Availability of Substitutes: More substitutes lead to more elastic demand. Consumers can easily switch to alternatives if the price increases.
• Necessity vs. Luxury: Necessities tend to have inelastic demand, while luxuries have elastic demand.
• Proportion of Income Spent: Goods that take up a large proportion of a consumer's income tend to have more elastic demand.
• Time Period: Demand tends to be more elastic over longer time periods as consumers have more time to adjust their consumption habits.
• Definition of the Product: A narrowly defined product tends to have more elastic demand than a broadly defined one.

Table Summarizing PED Categories