What is PED and how do we calculate it? (2024)

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Price elasticity of demand (PED) is a measure of the responsiveness in demand, following a change in price, of a good (defintion). It is calculated by the formula: % change in quantity demanded/ % change in price Example: A store decreases the price of an Xbox from £250 to £200. As a result, the demand for Xbox's increases from 500 units to 750 units. What is PED? STEP 1: Calculate the % increase in demand: (250/500)x100=50% STEP 2: Calculate the % decrease in price: (-50/250)x100=-20% STEP 3: Calculate the PED by plugging these numbers into the equation: 50/-20=-2.5 Conclusion: Here, thePED for an Xboxis -2.5. PED is considered inelastic when the value is between 0 and 1. This means demand isn't very responsive to a change in price (the % change in demand is less than proportional to the % change in price). PED is considered elastic when the value is greater than 1. This means demand is very responsive to a change in price (the % change in demand is more than proportional to the % change in price). PED is unit elastic when it is exactly 1. This means the demand changes by the exact amount that price changes by. What goods can you think of that would be price inelastic or elastic in demand? Is the demand for the Xbox price inelastic or elastic? Another example for you to consider: A store decreases the price of a pen from £4 to £2. As a result, demand increases from 50 units to 60 units. What is the PED of these pens?

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