What is PED and how do we calculate it?

Price Elasticity of Demand (PED) is a measure that evaluates how responsive the quantity demanded of a good is to a change in its price. It shows the sensitivity of consumers to price alterations. Formula for Calculation PED is calculated with the formula: PED = (% Change in Quantity Demanded) / (% Change in Price) Illustrative Example Consider a store reducing the price of an Xbox from £250 to £200, resulting in the demand increasing from 500 to 750 units. Calculate the Percentage Increase in Demand Increase in Demand = (750 - 500) / 500 * 100 = 50% Calculate the Percentage Decrease in Price Decrease in Price = (200 - 250) / 250 * 100 = -20% Determine the PED PED = 50% / -20% = -2.5 Conclusion In this example, the PED for an Xbox is -2.5. The elasticity of demand is categorized as follows: Inelastic Demand (0 < PED < 1): Demand is not very responsive to price changes. Elastic Demand (PED > 1): Demand is highly responsive to price changes. Unit Elastic Demand (PED = 1): Demand changes proportionally to price changes. For the Xbox, the demand is elastic as the PED is greater than 1. Consider another scenario with pens: A store reduces the price of a pen from £4 to £2, resulting in an increase in demand from 50 to 60 units. Increase in Demand = (60 - 50) / 50 * 100 = 20% Decrease in Price = (2 - 4) / 4 * 100 = -50% PED = 20% / -50% = -0.4 Here, the PED is -0.4, indicating inelastic demand for pens.

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Answered by: Krysia KEconomics Tutor
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