CHP 11 -

PRICE
ELASTICITY OF
DEMAND (PED)
IGCSE ECONOMICS (0455)
 PRICE ELASTICITY OF DEMAND (PED)

● DEFINITION: a measure of the responsiveness of the quantity demanded

to a change in price.

● FORMULA: PED = % change in quantity demanded = %🔺 Qd

% change in price %🔺 P
INTERPRETATION OF PED

PED gives 2 pieces of information:

● Sign → to tell us there is inverse relationship between the Qd and P

● Size → indicates the extent by which demand will extend or contract
when price changes. Example: PED= -2 means 1% change in P will
cause 2% change in Qd
ELASTIC & INELASTIC DEMAND

Elastic demand: when Qd changes by a greater percentage than the

change in P (PED >1).

Inelastic demand: when Qd changes by a smaller percentage than the

change in P (PED<1).

Note: ignore the sign of PED to determine elasticity.

 Example

Qd rise from 200 (Q1) to 240 (Q2) as a result of price falling from $10 (P1) to $9 (P2).

%🔺 in Qd = (change in demand / original Qd) x100 = (40/200)x100 = 20%

%🔺 in P = (change in price / original price) x 100 = (-$1/$10)x100 = -10%

PED = 20% / -10% = -2 (elastic)

 SCORING RUBRIC
APPLICATION 1 question worths 10 marks → % change in qty demanded = 4 marks, % change in price
= 4 marks, PED = 1 mark, Elasticity = 1 mark.

EFFORT 1 - absent and the 2 - absent but 3 - present, but 4 - present and
question is left answer the answer the answer the
unanswered within a question / present question incorrectly question correctly
week (up to 12 Jan but no answer
2021) within a week

BEHAVIOR 1 - absent and no 2 - absent with 3 - present and 4 - present and

news valid reason (e.g. responsive (give proactive in class
sick, family answer when
matter) / present asked)
but limited
response (e.g.
video is off)
 ADRIEL

CALCULATE THE PED & DETERMINE

ELASTICITY

1. A fall in price from $4 to $3 causes the demand to extend from 60 to 105.

Answer: ?
 ARDHITO
Dec 04

CALCULATE THE PED & DETERMINE

ELASTICITY

2. Demand falls from 200 to 180 when price rises from $10 to $12.

Answer:

-20/200 *100%=-10%

Percentage change in price 2/10*100% = 20%

PED = -10% / 20% = -0.5 (elastic) (inelastic)

CHECKED
 AUREL
02Dec
CALCULATE THE PED & DETERMINE
ELASTICITY

3. A reduction in price from $12 (P1) to $6 (P2) results in an extension in demand

from 100 (Q1) to 140 (Q2).

Answer: 140-100=40

=40 : 100 X 100= 40%

-6$ : 12$ X 100= -50% PED= 40 : -50 = -0.8 inelastic

CHECKED
 AVANINDRA
11 JAN

CALCULATE THE PED & DETERMINE

ELASTICITY

4. Demand for a luxury product falls from 500 (Q1) to 200 (Q2) when price rises
from $2000 (P1) to $2200 (P2).

Answer:

Change in Qd = 500 - 200 = 300 > (300 / 500) x 100 = 60%

CHANGES IN Qd = (Q2-Q1)/Q1 = (200-500)/500 = -⅗ = -0.6 = -60%
Change in P = 2000 - 2200 = -200 > (-200/2000) x 100 = -10%
CHANGES IN P = (P2-P1)/P1 = (2200-2000)/2000 = 200/2000 = 0.1 = 10%
Elasticity = 60%/-10% = -6% = Elastic
PED = -60% / 10% = 6 (elastic)
CHECKED
 RAMA 02 Dec

CALCULATE THE PED & DETERMINE

ELASTICITY
5. The price of a product falls from $8 to $6 causing demand to extend from 1250 to
12500.

Answer: % change in Qd = (change in demand/original Qd)=x 100

=(-2 / 8) *100 = -25% This should be the % change in P

% change in P = (change in price/original price)=x 100

= (11,250 / 1250) * 100 = 900% This should be the % change in Qd
PED=-25/900= -0.027% (inelastic)
PED = 900/25 = 36 (elastic)

CHECKED
 GAURAV
02 Dec

CALCULATE THE PED & DETERMINE

ELASTICITY

6. Demand contracts from 500 to 400 when price rises from $40 to $42.

Percentage change in demand

Answer:-100/500 *100=-20%

Percentage change in price 2/40*100=5%

PED = -20/5=-4 (elastic)

CHECKED
 JAMES 02 Dec

CALCULATE THE PED & DETERMINE

ELASTICITY
7. Demand extends from 2000 (Q1) to 2800 (Q2) when price falls from $20 (P1) to
$18 (P2).

Answer:

% change in Qd = (change in demand/original Qd)=x 100

= 800/2000 x 100 = 40%

% change in P = (change in price/original price)=x 100

= -2/20 x 100 = -10%

PED= 40% / -10%= -4 (elastic)

CHECKED
 JASMINE

CALCULATE THE PED & DETERMINE

ELASTICITY

8. Price rises from $15 to $30 but demand stays unchanged at 5000.

Answer: Q1= 15, Q2=30

🔺Q = Q2-Q1= 30-15= 15/15 x 100% = 100% This should be the % change in P (🔺P)

🔺P= 5000/5000 X 100% = 100% → incorrect

🔺Q = (5000-5000) / 5000 = 0 / 5000 = 0%

PED= 100/100= 1 (elastic)→ incorrect

PED = 0 / 100 = 0 (perfectly inelastic)

CHECKED
 MATTHEW
02 Dec
CALCULATE THE PED & DETERMINE
ELASTICITY
9. An increase in price from $80 (P1) to $90 (P2) and as a consequence, a decrease in
quantity demanded from 400 (Q1) to 300 (Q2).

Answer: PED = 80 x 90 = %🔺 Qd

= %400 x %300 = %🔺 P

= % 7200 Qd

= % 120000 P

NOTE: PLEASE TRY TO DO IT AGAIN. I HAVE HELPED YOU BY MARKING

WHICH ONE IS P1, P2, Q1, Q2. CHECKED
 RAJAKI
N
CALCULATE THE PED & DETERMINE
ELASTICITY

10. The price of a sack of rice falls from $25 (P1) to $24 (P2), resulting in an increase
in quantity demanded from 850 sacks (Q1) to 875 sacks (Q2) per month.

Answer: -4 divided by 3

Note: The answer above is wrong. Try again. Raja, please use the formula on slide 2 and
follow the example on slide 5 in order to answer the question above. I have helped you
by marking which one is P1, P2, Q1, and Q2.
 REYNARD
02 Dec
CALCULATE THE PED & DETERMINE
ELASTICITY

11. Shalma Fabrics sells 1350 units of wool per month at $4 each. Following an
increase in price to $4.60 per unit, the firm discovers that the quantity demanded falls to
1215 units per month.

Answer: Change in Qd = -135 / 1350 x 100 = -10%

Change in P = 0.60 / 4 x 100 = 15%

PED = -10% / 15% = -0.67 (inelastic)

CHECKED
DETERMINANTS OF PED

● The availability of substitutes of similar quality and price

● The proportion of income spent on the product
● The product is necessity (e.g. soap) or a luxury (e.g. a new car)
● The product is addictive (e.g. coffee, cigarettes) or not
● The purchase can be postponed or not
● How the market is defined (the narrower a product is defined, the more elastic its demand →
demand for a brand of tea is more elastic than demand for tea in general)
● The time period under consideration (demand becomes more elastic when the time period is
long because consumers have more time to switch their purchases)
DIFFERENCES IN PED

● PED for the same products can differ with time. What were once seen as luxuries can turn into
necessities as people become richer (elastic → inelastic), e.g. cell phone.

● PED for the same products can differ in different countries due to different tastes, income levels,
and culture. E.g. demand for rice is more inelastic in Indonesia than in USA.
DEGREES OF ELASTICITY

1. PERFECTLY ELASTIC DEMAND: when a change in price causes a complete change in the
quantity demanded.

PED
DEGREES OF ELASTICITY

2. ELASTIC DEMAND: when a change in price causes a greater % change in quantity demanded.
It’s often shown by a shallow demand curve.
DEGREES OF ELASTICITY

3. UNIT ELASTICITY OF DEMAND: when a change in price causes an equal change in the
quantity demanded, leaving total revenue unchanged.

PED = -1
DEGREES OF ELASTICITY

4. INELASTIC DEMAND: usually represented by a relatively steep demand curve.

DEGREES OF ELASTICITY

5. PERFECTLY INELASTIC DEMAND: when a change in price has no effect on the quantity
demanded.

PED = 0
CHANGES IN PED
● PED becomes more elastic as the price of a
product rises. Consumers become more
sensitive to price changes.
Perfectly elastic demand
● If the price of a product is kept increasing, there
will be a point where the demand of that product
becomes perfectly elastic (the product would be
priced out of the market).
● If the price falls to zero (0), there will be a limit
to the amount of people want to consume. At
this point, demand is perfectly inelastic.
● PED also changes when there is a shift in the Perfectly inelastic demand

demand curve. The more consumers want and

are able to buy a product, the less sensitive they
are to price changes. But when demand
decreases, consumers become more sensitive to
price changes and demand becomes more
elastic.
IMPLICATIONS OF PED FOR DECISION
MAKING
● Producers considering to have cut in price will need to know the extent of any rise in demand. If
demand is going to rise by only a relatively small amount, it may not pay to reduce the price.

● Producers may try to make their products more distinctive in order to discourage consumers
switching to competitors’ products (make demand of the product more price inelastic so the producer
would have more power to raise price).

● When demand is elastic:

○ Consumers are more likely to benefit from lower price & higher quality
○ Producers would be reluctant to raise price as demand would contract by a greater percentage &
revenue would fall
○ Government would place a tax to such product to discourage consumption