Post on 06-Mar-2023
PED• Price elasticity of demand measures the sensitivity of quantity demanded to a change in the price of said particular good
• Measures the percentage change in the quantity demanded for a good or service from a subsequent change in price of that same good or service
Formula
• By dividing the percentage change in quantity demanded (old quantity – new quantity / old quantity multiplied by hundred) by the percentage change in price (old price – new price divided by old price into one hundred)
Average method • In the average method instead of dividing with old quantity or price we divide the product with an amalgamation of both old and new
• old quantity – new quantity divide by average of old and new quantity
• old price – new price divide by average of old and new price
Indicators of PED• If Ped = 0 demand is perfectly inelastic - demand does not change at all when the price changes – the demand curve will be vertical.
• If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelastic.
• If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level.
• If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasticity of demand for this price change is –3
Elasticity of Demand and Total Revenue for a Producer
• At the point when Demand is inelastic – an ascent in value prompts an ascent altogether income – a 20% ascent in value may cause interest to shrink by just 5% (Ped = -0.25). At the point when interest is versatile – a fall in value prompts an ascent altogether income - for instance a 10% fall in value may cause interest to grow by just 25% (Ped = +2.5).