PED measures how strongly quantity demanded responds to a change in price.
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in the good's own price.
PED = percentage change in quantity demanded / percentage change in price. A percentage change is the change divided by the original value, times 100.
PED is negative because price and quantity demanded move in opposite directions. Economists often ignore the minus sign when comparing values, but keep it in a calculation answer.
Always use the original values as the base. Work out each percentage change first, then divide. Check the sign: a price rise with a fall in quantity gives a negative answer.
- PED
- Responsiveness of quantity demanded to a change in price.
- Formula
- PED = % change in quantity demanded / % change in price.
- Sign
- Usually negative, because price and quantity demanded move in opposite directions.
Worked example: Calculating PED step by step
Suppose a cinema cuts ticket prices from $12 to $9. Weekly tickets sold rise from 2,000 to 3,000.
- Change in price = 9 - 12 = -3. Percentage change = -3 / 12 x 100 = -25%.
- Change in quantity = 3,000 - 2,000 = 1,000. Percentage change = 1,000 / 2,000 x 100 = 50%.
- PED = 50% / -25% = -2.
- Interpret: the value is greater than 1 (ignoring the sign), so demand is price elastic.
Watch out for this
PED = change in price / change in quantity.
It is the other way round, and it uses percentage changes: percentage change in quantity demanded divided by percentage change in price.
Check your understanding
Price rises from $10 to $12 and quantity demanded falls from 500 to 450. What is the PED?
- -0.5
- -2
- -0.1