Price Elasticity of Demand: IGCSE Economics

PRICE ELASTICITY OF
DEMAND
IGCSE Econom ics
Price elasticity of demand
◦ Elasticity is the measurement which expresses the relationship between any two
variables.
◦ According to the law of demand when the price increases, the quantity demanded
will fall. Price elasticity of demand is the measurement to which extent the quantity
demanded changes when the price changes for a particular product.
◦ The percentage change in the quantity demanded of a product is divided by the
percentage change in the price of that product is known as Price Elasticity of Demand
(PED).
Formula for calculation of PED.
◦ Price elasticity of demand is calculated using the formula:
How to calculate PED.
Calculating PED.
◦ Example 1:
If a cinema increases its ticket price from $10 to $11 and this leads to demand falling
from 3500 to 3325 consumers per week, then the PED for cinema tickets it's calculated as:
◦ Example 2:
◦ The price of an electronic good increased by 50%. as a result of that, it's quantity
demanded has decreased by 75%. Calculate the coefficient of PED.
◦ Example 3:
◦ The demand schedule of a commodity sold in a competitive market is given
below. calculate the PED.
price Qd
5$ 100
10$ 80
Interpreting PED calculations
◦ PED can be used to interpret different things about the demand for a product.
◦ The value of price elasticity of demand will be negative most of the time due to the law
of demand- an increase in price will tend to decrease the quantity demanded.
◦ The size of the figure tells us the extent to which the quantity demanded will change
when price changes. For an example, a PED of –2 indicates that 1% change of price
will cause a 2% change in quantity demanded.
Types of price elasticity of demand
01. Elastic demand.
If the percentage change in quantity demanded is greater than the percentage
change in price that is elastic demand.
Here, the coefficient of PED is greater than one.
The shape of the demand curve will always be as follows:
Examples:
1. luxury goods
2. goods which have more
substitutes
3. good speech can be used for a
long time
02. Inelastic demand.
if the percentage change in quantity demanded is less than the percentage change in
price, that is known as inelastic demand.
Here, the coefficient of PED is less than one.
Shape of the demand curve will be as follows:
Examples:
1. Necessary goods like rice and
Pharmaceuticals.
2. Goods which has less substitutes like gas and
petrol
3. Goods that can be used for a short period
like fish
4. Addictive goods like cigarettes
03. Perfectly price elastic demand
If the PED of a product is equal to Infinity then demand is perfectly price elastic: , that
is, change in price leads to zero quantity demanded. This suggests that customers switch
to buy other substitute products if suppliers raised their price.
Price will be fixed and the quantity demanded changes.
Examples:
Perfectly competitive firms
04. Perfectly price inelastic demand.
◦ If the PED for the product is 0, then the demand is perfectly price inelastic: that is, a
change in price has no impact on the quantity demanded. This suggests that there is
absolutely no substitute for such a product, so supplies can change whatever price
they like.
◦ Quantity demanded remains the same and price changes.
Examples:
Goods with less or no substitutes
like water and prescription
drugs.
05. Unit price elasticity of demand
◦ If the PED is equal to 1 ( ignoring the minus sign), then demand has unitary price
elasticity: that is, the percentage change in the quantity demanded is proportional to
the change in the price.
Examples:
Not practical
Determinants of Price Elasticity of Demand.
1. The number and kinds of substitutes:
Elasticity is relatively more for the products which have a greater number and availability
of close substitutes. The higher the value of its PED will tend to be. This is because such
products are easily replaced if the price increases, due to the large number of substitutes
that are readily available.
Products with few substitutes ( like tooth picks and prescribed medicines) have relatively
price inelastic demand.
2. Income:
If the money which is spent for the consumption of a specific product has a small portion
in income, the elasticity for them is less. Example : salt, soap, etc...
Otherwise elasticity is more. Example: necessary food items, clothes etc...
3. Necessity:
Essential products ( like food, fuel, medicines, housing and transportation) tend to be relatively
price inelastic because households need these goods and services, so will continue to purchase
them even if their prices rise.
◦ The demand for luxury products ( like Gucci suits and Chanel hand bags) is price elastic as
these are not necessities.
◦ Luxury goods- elastic demand
◦ Necessary goods- inelastic demand
4. Habits, addictions, fashion and trends:

The PED of highly addictive and fashionable products tend to be inelastic because the demand
to such products tend to be less sensitive to price.
5. Advertising and brand loyalty:
Effective advertising campaigns can cause the demand curve to shift to the right as well as
make the price elasticity inelastic to that product.
Customers who are loyal to certain brands show less sensitiveness to changes in price as they are
demanded out of habit and due to personal preference.
7. Time:
The period of time under consideration can affect the value of PED.
Demand tends to be more price elastic in the long run.
8. Durability:
The more durable a product is, the more price elastic its demand tends to be.
For an example, fresh milk is a perishable good and need to be replaced, so customers
will continue to buy even if prices rise. In contrast, if the price of more durable products ( like a
LCD TV or car) rises, then customers might decide to postpone the decision of buying the
product.
9. The cost of switching:
When the cost of switching products are high, the demand for the product is less sensitive to
changes in price- that is, tends to be price inelastic.
Summary of PED
Elastic Inelastic Unit elastic Perfectly Perfectly
inelastic elastic
Definition % change in Qd % change in Qd < % change in Qd Qd is contant Price is constant,

> % change in price % change in price = % change in price when Price Qd changes
changes
Value of PED > 1 PED < 1 PED =1 PED = 0 PED = ∞

PED
Demand
curve
Examples Luxury goods necessary not practical products with perfectly

goods less or no competitive
substitutes firms
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PRICE ELASTICITY OF

4. Habits, addictions, fashion and trends:

Definition % change in Qd % change in Qd < % change in Qd Qd is contant Price is constant,

Value of PED > 1 PED < 1 PED =1 PED = 0 PED = ∞

Examples Luxury goods necessary not practical products with perfectly

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