Price Elasticity of Demand (PED)

A typical 4-mark "calculate PED" question rewards a clear three-step method plus a one-line interpretation.

Step 1. Calculate the percentage change in quantity demanded.

Step 2. Calculate the percentage change in price.

Step 3. Divide: PED = %ΔQd ÷ %ΔP.

Step 4. Interpret the result: say whether demand is elastic (|PED| > 1) or inelastic (|PED| < 1), and what that means for total revenue.

Example — A bus operator cuts the fare for its city-centre route from £3 to £2.40. The number of journeys per week rises from 5,000 to 6,500. Calculate the PED and explain the result.

Step 1: percentage change in Qd

%ΔQd = (6,500 − 5,000) ÷ 5,000 × 100 = +30 %

Step 2: percentage change in P

%ΔP = (2.40 − 3.00) ÷ 3.00 × 100 = −20 %

Step 3: calculate PED

PED = +30 ÷ −20 = −1.5

Taking the absolute value: |PED| = 1.5.

Step 4: interpret

|PED| = 1.5 > 1, so demand is relatively elastic. The percentage rise in journeys (30%) is larger than the percentage cut in fares (20%). The fare cut therefore raises total revenue, because the rise in passenger numbers more than compensates for the lower price per journey.

Confirming with total revenue:

• Old TR = £3.00 × 5,000 = £15,000 per week.
• New TR = £2.40 × 6,500 = £15,600 per week.
• TR rises by £600. The fare cut was the right decision for revenue.

Always quote the units of the answer and keep the working visible. Examiners apply error-carried-forward (ECF): a slip in step 1 still scores marks for steps 2–4 if those are internally consistent.