The price elasticity of demand, or PED predicts how the quantity demanded of a good or service would change when the price gets higher or lower.
If there is a small change in consumer demand when the price of a good or service rises or lowers, this means that the demand for the product is price inelastic. If there is a big change in consumer demand when the price of a good or service rises or lowers, this means that the demand for the product is price elastic.
To calculate PED, we use the following formula:
PED = % change in demand / % change in price
Here is an article that shows you how to calculate the percentage change.
Once you know the PED, you can figure out if the demand is elastic or inelastic like this:
If the PED is greater than 1, then demand is price elastic
If the PED is exactly 1, then demand is unit elastic
If the PED is less than 1, then demand is price inelastic
Knowing the PED can be very useful for firms because they can see how many customers they will gain or lose if they changed the price of their product.
Let's look at some examples:
The demand for a loaf of bread is price inelastic because people who want to buy the bread don't usually care much about the price. Therefore, if the bread producers made the loaf of bread 10 cents more expensive, very few people would not buy bread that day because of the price.
On the other hand, the demand for a flat-screen TV is price elastic because there are many TV options out there in the market and you want to get the cheapest and best-quality one. You usually don't mind at all buying the TV a week later than buying it immediately if the price has gone up 20 euros.
If there is a small change in consumer demand when the price of a good or service rises or lowers, this means that the demand for the product is price inelastic. If there is a big change in consumer demand when the price of a good or service rises or lowers, this means that the demand for the product is price elastic.
To calculate PED, we use the following formula:
PED = % change in demand / % change in price
Here is an article that shows you how to calculate the percentage change.
Once you know the PED, you can figure out if the demand is elastic or inelastic like this:
If the PED is greater than 1, then demand is price elastic
If the PED is exactly 1, then demand is unit elastic
If the PED is less than 1, then demand is price inelastic
Knowing the PED can be very useful for firms because they can see how many customers they will gain or lose if they changed the price of their product.
Let's look at some examples:
The demand for a loaf of bread is price inelastic because people who want to buy the bread don't usually care much about the price. Therefore, if the bread producers made the loaf of bread 10 cents more expensive, very few people would not buy bread that day because of the price.
On the other hand, the demand for a flat-screen TV is price elastic because there are many TV options out there in the market and you want to get the cheapest and best-quality one. You usually don't mind at all buying the TV a week later than buying it immediately if the price has gone up 20 euros.
Walmart, one of the biggest American shopping brands
Exercises
Let's do some exercises now, write your answers in the comment section below.
1) Tell me the if the demand for a train ticket is price elastic or inelastic and why.
2) Apart from what I wrote above, why is knowing the PED useful for a company?
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