Price elasticity of demand

1. The responsiveness of quantity demanded to a change in price. PED is calculated by %

change in quantity demanded/% change in price.
2. % change in demand = -10, % change in price = 40% PED = -0.25 it is price inelastic as
quantity doesn’t decrease relative to how price increases leaving the coefficient as between
0 and 1. Demand curve will be steep.
3.

Price (£) Quantity Demanded Total Revenue (£)

400 1400 560,000
500 1000 500,000
600 600 360,000
When price rises to £600 the % change in demand = -40%, % change in price = 20%, PED = -2.

When price falls to £400 the % change in demand = 40%, % change in price = -20%, PED = -2

Demand is elastic as coefficient is greater than 1. Demand curve will be shallow. The PED is elastic
which means that they should decrease prices. This increases total revenue as shown in the table
from £500,000 to £560,000.

4. PED for a normal good should be negative, this is because there is an inverse relationship
between price and quantity demanded. A steep demand curve suggests that the good is
inelastic i.e., it is relatively unresponsive to a change in price. For a good which is elastic in
nature, the percentage change in quantity demanded is more than the percentage change in
price.