PRICE ELASTICITY OF DEMAND

(PED)
 DEFINITION

Price elasticity of demand measures the responsiveness of quantity demanded for a

product to a change in price.

It is one of the most important concepts in business, particularly when making decisions
about pricing and the rest of the marketing mix.
It is calculated by the formula:
%△𝑄𝐷
PED=
%△𝑃
 RELATIVELY ELASTIC DEMAND
A price elastic good is very responsive to a change in price. In other words, the change in
price leads to an even bigger change in demand. The numerical value for
PED is >1
 RELATIVELY INELASTIC DEMAND
A price inelastic good has a demand that is relatively unresponsive to a change in price.
PED is <1.
 UNITARY ELASTIC DEMAND
A unitary elastic good has a change in demand which is equal to the change in price.
PED = 1
PERFECTLY INELASTIC DEMAND

A perfectly inelastic good has a demand which does not change when price
changes.
PED = 0
PERFECTLY ELASTIC DEMAND

A perfectly elastic good has a demand which falls to zero when price changes.

PED = ∞
FACTORS INFLUENCING PED

 Necessity
 Substitutes
 Addictiveness or habitual consumption
 Proportion of income spent on the good
 Durability of the good
 Peak and off-peak demand
 FIRMS CAN USE PED ESTIMATES TO
PREDICT:
 The effect of a change in price on the total revenue & expenditure on a product
 The likely price volatility in a market following changes in supply – this is important for
commodity producers who may suffer big price movements from time to time
 The effect of a change in an indirect tax (e.g. VAT, fuel or other duties) on price and
quantity demanded and also whether the business is able to pass on some or all of the
tax onto the consumer
 A business contemplating a tactical price-war or planning a promotional discount based
on price (e.g. 50% off for a limited period) will want to know how responsive customer
demand will be to the pricing tactics used
THANK YOU