Interpretation of the significance of the PED value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic

Published by Patrick Mutisya · 14 days ago

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

Price Elasticity of Demand (PED)

Price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to a change in its price. It is a crucial concept for understanding how consumers react to price changes and for making decisions about pricing, taxation, and subsidies.

Formula

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

where Qd is quantity demanded and P is price. A negative sign is usually omitted because the law of demand implies an inverse relationship.

Interpreting the PED \cdot alue

The numerical value of PED indicates the degree of responsiveness. The following categories are used in IGCSE economics:

PED rangeElasticity typeInterpretation
0Perfectly inelasticQuantity demanded does not change at all when price changes. Consumers are completely unresponsive.
0 < |PED| < 1InelasticA price change leads to a proportionally smaller change in quantity demanded. Revenue moves in the same direction as price.
|PED| = 1Unitary elasticPercentage change in quantity demanded equals the percentage change in price. Total revenue remains unchanged.
1 < |PED| < ∞ElasticA price change leads to a proportionally larger change in quantity demanded. Revenue moves in the opposite direction to price.
∞Perfectly elasticAny increase in price causes quantity demanded to fall to zero; any decrease leads to an infinite quantity demanded. Consumers are infinitely responsive.

Why the Sign Is Ignored

Because the law of demand predicts a negative relationship between price and quantity demanded, the PED is usually expressed as an absolute value. This allows the focus to be on the magnitude of responsiveness rather than the direction.

Practical Implications

  • Pricing decisions: Firms with elastic demand must be careful with price increases, as they could lose revenue.

  • Tax policy: Taxes on inelastic goods (e.g., tobacco) generate revenue with little change in quantity demanded.

  • Subsidies: Subsidising a good with elastic demand can significantly boost consumption.

Worked Example

Suppose the price of a product rises from \$10 to \$12 and the quantity demanded falls from 500 units to 400 units. Calculate the PED.

  1. Calculate the percentage change in price:

    \$\%\Delta P = \frac{12-10}{10}\times 100 = 20\%\$

  2. Calculate the percentage change in quantity demanded:

    \$\%\Delta Q_d = \frac{400-500}{500}\times 100 = -20\%\$

  3. Apply the PED formula (ignoring the sign):

    \$\text{PED} = \frac{| -20\% |}{20\%} = 1\$

The demand is unitary elastic. A price increase does not affect total revenue.

Suggested diagram: Four demand curves illustrating perfectly inelastic, inelastic, elastic, and perfectly elastic demand. Label each curve and show a small price change to highlight the differing quantity responses.

Key Points to Remember

  • PED < 1 → Inelastic (quantity changes less than price).

  • PED = 1 → Unitary elastic (proportional change).

  • PED > 1 → Elastic (quantity changes more than price).

  • PED = 0 → Perfectly inelastic (no change in quantity).

  • PED = ∞ → Perfectly elastic (any price rise eliminates demand).