0455

Price Elasticity of Demand (PED)

Allocation of Resources · 4 question types

Practise

Exam Frequency Analysis

Past paper frequency (2018 to 2024)

This topic accounts for approximately 15% of your exam marks.

increasing
Very High
Increasing15%

PED definition, formula, calculation, and revenue application appear regularly; trending upward since 2021.

PED=% Δ Qd% Δ P\text{PED} = \dfrac{\%\,\Delta\,Q_d}{\%\,\Delta\,P}

That is, PED is the percentage change in quantity demanded divided by the percentage change in price. Both numbers are percentages, not raw unit changes.

To work out either percentage change:

% change=new value−old valueold value×100\% \,\text{change} = \dfrac{\text{new value} - \text{old value}}{\text{old value}} \times 100

A short illustration before the full template. The price of a takeaway pizza rises from £8 to £10, and quantity demanded falls from 200 to 150 per evening.

  • %ΔP = (10 − 8) ÷ 8 × 100 = +25 %
  • %ΔQd = (150 − 200) ÷ 200 × 100 = −25 %
  • PED = −25 ÷ 25 = −1

The PED value for a normal good is always negative (price and quantity move in opposite directions). Examiners often expect the absolute value and accept either −1 or 1 as long as the candidate explains the sign convention. Mark schemes typically use the absolute value, so this set of notes does the same unless otherwise stated.

Worked example

Calculating price elasticity of demand (PED)

When the price of a good rises from $4 to $5, the quantity demanded falls from 200 to 180 units. Calculate the PED and state whether demand is elastic or inelastic.

Solution:

  • Percentage change in quantity: %ΔQd = (180 − 200) ÷ 200 × 100 = −10%
  • Percentage change in price: %ΔP = (5 − 4) ÷ 4 × 100 = +25%
  • PED = %ΔQd ÷ %ΔP = −10 ÷ 25 = −0.4
  • |PED| = 0.4, which is less than 1, so demand is inelastic.

Always use percentage changes, never the absolute changes: dividing the absolute fall in quantity (20) by the absolute rise in price (1) gives 20, which is wrong.