Summary
Highlights
The absolute value of PED is used for interpretation. If the absolute value of PED is less than one, demand is considered inelastic (e.g., 0.25). This means a given percentage change in price leads to a smaller percentage change in quantity. If the absolute value of PED is greater than one, demand is considered elastic (e.g., 9). This means a given percentage change in price leads to a larger percentage change in quantity. Even with a linear demand curve, PED can change at different points due to varying initial prices and quantities.
Price elasticity of demand (PED) measures how sensitive the quantity demanded is to changes in price. It is calculated as the percent change in quantity divided by the percent change in price. An analogy with inelastic and elastic rubber bands helps explain the concept: an inelastic band stretches little with force, while an elastic band stretches much. Similarly, inelastic demand means quantity changes little with price changes, while elastic demand means quantity changes a lot.
Using a demand schedule for burgers, we calculate PED as we move from point A to point B. The initial quantity is 2, changing to 4, representing a 100% change. The initial price is 9, changing to 8, a decrease of 1/9 or approximately 11%. Therefore, PED from A to B is 100% / -11% = -9. This indicates highly elastic demand.
Next, we calculate PED from point E to point F. The initial quantity is 16, changing to 18, a change of 2/16 or 12.5%. The initial price is 2, changing to 1, a change of -1/2 or -50%. Thus, PED from E to F is 12.5% / -50% = -0.25. This indicates inelastic demand.