Price Elasticity of Demand
Price Elasticity of Demand (PED) measures the reactivity of consumers level of quantity demanded of a product in response to a change in price. PED can be found using the formula above. to determine whether good can be considered elastic or inelastic in nature.
In economics, we can write the formula using symbols to make it easier to remember. As shown, the triangle means 'change.' This is helpful to note, as, in essays or short responses, marks may be given if you show your knowledge of the formula.
PED Outcomes and Factors
The table above shows what the values of PED represent in regards to the elasticity of goods. There are many factors that can determine the elasticity of goods.
The number of alternatives: PED is more elastic if a good has a multitude of substitute products.
Percentage of Income: If the good takes up a large portion of consumers income, PED is generally more inelastic.
The broadness of the Market: If the market of a good is more broad, such as the market for cars, then the PED will be more inelastic. However, for a specific market, like a certain brand of car, the PED will be more elastic.
Urgency: PED is more inelastic when a purchase is necessary or urgent.
Time: If consumers have lots of time to respond to a change in price, the good will be more elastic.
Price Elasticity of Demand and Revenue
A company's revenue is found by measuring the total income collected by a firm in a given period of time. Revenue can be demonstrated on a supply and demand model by a 'revenue box,' as shown in the graph above. Using this model, producers can find their total revenue by multiplying the price by the quantity demanded. This helps firms find the price point where revenue is maximised so they can make the most profit.
Another method of calculating PED is the midpoint formula. This uses the average prices and levels of quantity demanded. In doing this, the answer does not depend on which price is chosen as the starting price.
(Tip: This formula is important to have memorised, as it can be a common in the multiple-choice or data section.)