Price Elasticity of Demand (PED) Calculator
Calculate the Price Elasticity of Demand using the Midpoint Method to measure how quantity demanded responds to a price change.
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Understanding Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED) measures the sensitivity of the quantity demanded for a good or service to a change in its price. It tells us the percentage change in quantity demanded in response to a one percent change in price.
How PED is Calculated (Midpoint Method):
The Midpoint Method provides a more accurate measure of elasticity between two points, regardless of the direction of change:
$PED = \frac{\% \Delta Q_d}{\% \Delta P} = \frac{(Q_2 - Q_1) / ((Q_2 + Q_1)/2)}{(P_2 - P_1) / ((P_2 + P_1)/2)}$
Where:
- $Q_1$ = Initial Quantity Demanded
- $Q_2$ = New Quantity Demanded
- $P_1$ = Initial Price
- $P_2$ = New Price
Interpreting the PED Value:
The PED coefficient is usually negative due to the inverse relationship between price and quantity demanded (law of demand). However, interpretation typically focuses on the **absolute value** (ignoring the negative sign):
- Elastic Demand ($|PED| > 1$): A change in price leads to a proportionally larger change in quantity demanded. Consumers are highly responsive to price changes. (e.g., luxury goods, goods with many substitutes).
- Inelastic Demand ($|PED| < 1$): A change in price leads to a proportionally smaller change in quantity demanded. Consumers are not very responsive to price changes. (e.g., necessities like basic food or medicine, goods with few substitutes).
- Unit Elastic Demand ($|PED| = 1$): A change in price leads to a proportionally equal change in quantity demanded.
- Perfectly Inelastic Demand ($PED = 0$): Quantity demanded does not change at all regardless of price changes (rare, theoretical).
- Perfectly Elastic Demand ($|PED| = \infty$): Consumers will demand an infinite amount up to a certain price, but none above that price (rare, theoretical, represents extreme price sensitivity).
Factors Affecting PED:
- Availability of Substitutes (more substitutes = more elastic)
- Necessity vs. Luxury (necessities = inelastic, luxuries = elastic)
- Proportion of Income (goods taking a large % of income = more elastic)
- Time Horizon (demand becomes more elastic over longer periods)
- Definition of the Market (narrowly defined markets = more elastic)
Importance for Businesses:
Understanding PED helps businesses make crucial pricing decisions. For example:
- If demand is elastic, lowering the price might significantly increase quantity demanded and potentially total revenue. Raising the price could drastically reduce demand and revenue.
- If demand is inelastic, raising the price might lead to a smaller drop in quantity demanded, potentially increasing total revenue.
Frequently Asked Questions (FAQs) about PED
Why use the Midpoint Method?
It gives the same elasticity value regardless of whether the price increases or decreases between two points. Simple percentage change methods can give different results depending on the starting point.
Why is PED usually negative?
Because of the Law of Demand: as price increases, quantity demanded typically decreases, and vice-versa. This inverse relationship results in a negative PED value mathematically.
Can PED be positive?
Yes, although it's rare. It applies to "Giffen goods" or "Veblen goods" where demand increases as price increases, violating the typical Law of Demand.
