Price Elasticity of Demand (PED) 1.2.4

Price elasticity of demand (PED) - Measures the extent to which the quantity of a product demanded is affected by a change in price.

The demand for goods and services varies depending on a range of factors.

Elasticity - measures the responsiveness of demand to a change in a relevant variable - such as price or income.

PED IS CALCULATED AS :

% Change in Quantity Demanded ÷ % Change in Price

Price Elastic - More than 1
Price Inelastic - Less than 1
Unitary price elasticity - Exactly 1

Price elastic = Change in demand is more than the change in price.

Price inelastic = Change in demand is less than the change in price.

Unitary price elasticity = change in demand is equal to change in price.

Example of Inelastic demand:

Gasoline has inelastic demand. This means that when there's an increase in the price of gasoline, the quantity demanded decreases just a little bit.

So when the demand is inelastic, the quantity is insensitive to a change in price and goes in the other direction when price falls. The quantity demanded goes up, but just a little bit.

So when price goes down, you buy a little bit more

When the price goes up by a little bit less, insensitive to a change in price.

The reason for this is because products that have an inelastic demand have very few substitutes when it comes to gasoline there's nothing else you can put in your car.