Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult

Calculation of PED:

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

PED = (-30%) / (10%) = -3

Interpretation: The PED for this product is -3. The negative sign is omitted when discussing elasticity, so we say the PED is 3.

What this indicates about the product's demand: A PED value of 3 indicates that the demand for this product is highly elastic. This means that consumers are very sensitive to changes in price. A 10% increase in price leads to a 30% decrease in quantity demanded.

Implications for the firm: This information is crucial for the firm's pricing strategy. If the firm increases the price, it will experience a significant fall in quantity demanded, leading to a decrease in total revenue. Therefore, the firm should be cautious about raising prices, as it could lose a large proportion of its customers. The firm might consider lowering the price to increase sales.