Price elasticity of demand measures how responsive consumer demand is to changes in price. It is calculated by taking the percentage change in quantity demanded divided by the percentage change in price. Demand can be elastic, inelastic, perfectly elastic, perfectly inelastic, or unit elastic depending on how much quantity demanded changes relative to price changes. Factors like availability of substitutes, necessity of the product, and proportion of income spent on it affect price elasticity. Understanding price elasticity helps firms set prices to maximize total revenue.

1. PRICE ELASTICITY
OF DEMAND
Mudassir Raza

2. Definition of PED
Calculation of PED
Determinants of PED
PED and total spending on a product/revenue
Significance of PED
Learning
Objectives

3. Price Elasticity of Demand
The responsiveness of consumers demand to changes in the price of a
good or service is known as the price elasticity of demand of that product.

4. Calculating
PED

5. Calculating
PED
Percentage change in quantity demanded:
Change in demand ✕100
Original quantity demanded
Percentage change in price:
Change in price ✕100
Original price

6. Calculating
PED
Example:
a) The quantity demanded may rise from 200 to 240 as
a result of price falling from $10 to $9
b) A fall in price from $4 to $3 causes the demand to
extend from 60 to 105.

7. Elastic Demand
When the quantity demanded
changes by a greater percentage
than the change in price.

8. Inelastic Demand
When the quantity demanded
changes by a smaller percentage
than the change in price.

9. Determinants of
Price Elasticity of
Demand
If the product a necessity
The number of close substitutes a
product has
The amount of time consumers have to
search for substitutes
The cost of switching to a different
supplier
The proportion of a consumer's income
spent on the product

10. Perfectly Elastic Demand
When a change in price causes a
complete change in quantity
demanded.
Perfectly elastic demand is
represented graphically by a
horizontal line. In this case the
PED value is the same at every
point of the demand curve.
In this case, any increase in price
will lead to zero units demanded.

11. Perfectly Inelastic
Demand
When a change in price has no
effect on the quantity demanded.
Perfectly inelastic demand is
graphed as a vertical line and
indicates a price elasticity of zero
at every point of the curve. This
means that the same quantity will
be demanded regardless of the
price.

12. Unit Elasticity of Demand
When a change in price causes an equal
change in the quantity demanded, leaving
total revenue unchanged.
Elasticity along a straight line demand
curve varies from zero at the quantity axis
to infinity at the price axis. Below the
midpoint of a straight line demand curve,
elasticity is less than one and the firm
wants to raise price to increase total
revenue. Above the midpoint, elasticity is
greater than one and the firm wants to
lower price to increase total revenue. At
the midpoint, E1, elasticity is equal to one,
or unit elastic.

13. Understanding the values of Ped
1.If Ped = 0 demand is said to be perfectly inelastic. This means that demand
does not change at all when the price changes – the demand curve will be drawn as
vertical.
2.If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is
smaller than the percentage change in price), then demand is inelastic.
3.If Ped = 1 (i.e. the percentage change in demand is exactly the same as the
percentage change in price), then demand is said to unit elastic. A 15% rise in
price would lead to a 15% contraction in demand leaving total spending by the
same at each price level.
4.If Ped > 1, then demand responds more than proportionately to a change in price
i.e. demand is elastic. For example a 20% increase in the price of a good might
lead to a 30% drop in demand. The price elasticity of demand for this price change
is –1.5.

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THANK