How is PED calculated and interpreted?

PED, or Price Elasticity of Demand, is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

Price Elasticity of Demand (PED) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. It is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in price. This gives a ratio that can be used to analyse how sensitive the demand for a product is to changes in price.

The formula for calculating PED is:

PED = (% Change in Quantity Demanded) / (% Change in Price)

To interpret the PED, you need to understand that it will always be a negative number, due to the law of demand - as price increases, quantity demanded decreases and vice versa. However, we often ignore the negative sign and focus on the absolute value for interpretation.

If the PED is greater than 1, we say that the demand is elastic. This means that consumers are very responsive to changes in price. If the price goes up, consumers will buy a lot less of the good, and if the price goes down, they will buy a lot more.

If the PED is less than 1, the demand is inelastic. This means that consumers are not very responsive to changes in price. If the price goes up, they won't buy much less of the good, and if the price goes down, they won't buy much more.

If the PED equals 1, the demand is unit elastic. This means that the percentage change in quantity demanded is exactly the same as the percentage change in price.

Understanding the PED can help businesses and policymakers make decisions about pricing and taxation. For example, if a business knows that the demand for its product is elastic, it might decide to lower prices to increase sales. On the other hand, if the government knows that the demand for a harmful product is inelastic, it might decide to increase taxes on that product to reduce consumption without significantly affecting tax revenue.