Price Elasticity of Demand (PED)
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Measure of the responsiveness of the quantity of a good demanded to changes in its price
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PED = percentage change in Qdx / percentage change in Px
The Sign of PED
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The result of PED will always be negative since the demand curve is a negative slope
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We interpret the absolute value of PED
PED value indicator
Varying PEDs on a demand curve
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Demand is elastic at high prices and low quantity
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Demand is inelastic at low prices and high quantity
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Demand is unit elastic at the midpoint of demand curve
PED Determinants (THINS)
PED and Total Revenue
Total Revenue
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The amount of money a firm received when selling their goods
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TR = Price * Quantity
PED and Primary Commodities
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Goods arising directly from the use of natural resource, ot FOP ‘land’
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Primary commodities (necessities) have low PED; Manufactured goods (substitutes) have relatively higher PED
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When PED is low, a shift in supply will cause huge price fluctuations, which is bad for primary commodities
Primary Commodities
PED and Indirect tax
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The lower the PED, the higher the government revenue is
