1.2.4 Price elasticity of demand - syllabus
Students should be able to:
• Define price elasticity of demand (PED)
• Calculate and interpret numerical values of
price elasticity of demand
• Analyse factors that influence PED
• Evaluate the significance of PED to
businesses in terms of implications for pricing
• Calculate and interpret the relationship
between PED and total revenue
Elasticity definition
Elasticity tries to identify the impact of
changes that one variable (e.g. price) has
on another variable (usually quantity
demanded).
If prices are lowered we would expect
demand to ________ and elasticity
measures this.
Price elasticity of demand formula
Price elasticity of demand refers to how
much demand changes when there is a
change in price. The formula is:
Price elasticity = % change in quantity demanded
% change in price
% change = difference X 100
original
PED example
E.g. if the price of a chocolate bar falls from
40p to 36p and demand rises from 1000
bars per week to 1200 bars a week then:
Change in quantity =
% change in quantity =
=
Change in price =
% change in price =
Price elasticity =
Price elastic
So the demand for the chocolate is
relatively price elastic as:
a small percentage change in price
brought about a bigger percentage change
in quantity demanded.
Price elastic and price inelastic
Sometimes people say that the price
elasticity is high, this is another way of
saying it is price elastic and responsive to
changes in price.
Similarly, if the price elasticity is low this
means demand is price inelastic and less
responsive to changes in price.
If the demand curve is vertical it looks more
like an ‘I’ for inelastic, when the demand
curve is almost horizontal it looks more like a
capital ‘E’ for elastic
Determinants of price elasticity
The main determinants of price elasticity:
 the degree of product differentiation e.g.
the availability of substitutes / competition –
the fewer the substitutes the _____ the PED
 time
 type of product –
 proportion of income required

Why do firms use PED?
•
Sales forecasting –
•
Pricing strategy –
•
Revenue calculations –
Revenue =
Firms and elasticity
Why would firms prefer to sell products
with price-inelastic demand?
How can firms reduce price elasticity?