Price Elasticity of Demand
Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Formula: PED = (% Change in Quantity Demanded) / (% Change in Price)
If PED > 1, demand is considered elastic (sensitive to price changes). If PED < 1, demand is inelastic (less sensitive). If PED = 1, demand is unitary elastic.
Examples:
- Elastic Demand: Luxury items, like designer handbags, often have elastic demand. A 10% increase in price may lead to a 20% drop in quantity demanded.
- Inelastic Demand: Necessities, like insulin for diabetics, typically have inelastic demand. A 10% increase in price may only result in a 2% decrease in quantity demanded.
Cases:
- Case 1: A small coffee shop raises the price of a latte from $4 to $5. If the quantity sold drops from 100 lattes to 70, the PED is calculated as follows: % Change in Quantity Demanded = (70 – 100) / 100 = -30%