Definition of PED

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Allocation of Resources: Price Elasticity of Demand (PED)

The Allocation of Resources – Price Elasticity of Demand (PED)

Objective

Students will be able to define Price Elasticity of Demand (PED) and understand the formula used to calculate it.

Definition of Price Elasticity of Demand

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price.

It is expressed as the percentage change in quantity demanded divided by the percentage change in price:

\$\text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}\$

Where:

  • \(\%\Delta Q_d\) = percentage change in quantity demanded

  • \(\%\Delta P\) = percentage change in price

Interpretation of PED \cdot alues

The magnitude of the PED value indicates how sensitive consumers are to price changes:

PED \cdot alueElasticity TypeInterpretation
0 < |PED| < 1InelasticQuantity demanded changes less than proportionally to price.
|PED| = 1Unit‑elasticQuantity demanded changes proportionally to price.
|PED| > 1ElasticQuantity demanded changes more than proportionally to price.
|PED| = 0Perfectly inelasticQuantity demanded does not respond to price changes.
|PED| = ∞Perfectly elasticAny price increase causes quantity demanded to fall to zero.

Key Points to Remember

  1. PED is always expressed as a positive number; the sign is omitted because the law of demand implies an inverse relationship.

  2. A higher absolute value of PED indicates greater sensitivity to price changes.

  3. Factors influencing PED include the availability of substitutes, proportion of income spent on the good, necessity vs. luxury status, and time horizon.

Suggested diagram: A standard demand curve illustrating elastic, unit‑elastic, and inelastic segments with corresponding PED values.