Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED)
Definition
Price Elasticity of Demand (PED) measures how much the quantity demanded of a product changes when its price changes. It shows how sensitive or responsive consumers are to changes in price.
Formula
If PED > 1 → Demand is elastic
If PED < 1 → Demand is inelastic
If PED = 1 → Demand is unitary elastic
Types of Price Elasticity of Demand
Elastic Demand (>1):A small change in price causes a large change in demand.Example: luxury goods, branded clothes.
Inelastic Demand (<1):Even if price changes, demand changes very little. Example: salt, petrol, medicines.
Unitary Elastic (=1):The percentage change in demand equals the percentage change in price.
Perfectly Elastic (∞):Demand falls to zero if price rises even slightly.Example: products in highly competitive markets.
Perfectly Inelastic (0):Demand stays the same even if price changes.Example: life-saving drugs.
Importance of PED
Helps businesses decide how to set prices to increase revenue.
Helps governments understand the effect of taxes on goods.
Helps identify whether a product is a necessity (inelastic) or a luxury (elastic).
Useful for making production and marketing decisions.