PED
AQA also says:
Spec content: Price elasticity of demand; Factors affecting PED; Measuring PED.
Students should be able to: understand elastic vs inelastic demand; apply the PED formula; explain factors affecting PED; analyse revenue implications for producers.
What is PED?
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price.
PED = % change in quantity demanded ÷ % change in price
PED is almost always negative (price rises → Qd falls). We use the absolute value |PED| for comparisons:
- |PED| > 1 → price elastic: Qd changes by a larger % than price. Consumers are responsive.
- |PED| < 1 → price inelastic: Qd changes by a smaller % than price. Consumers are unresponsive.
- |PED| = 1 → unit elastic: % changes are equal.
Factors Affecting PED
- Substitutes — many close substitutes → elastic; few substitutes → inelastic.
- Necessity vs luxury — necessities (insulin, bread) → inelastic; luxuries (holidays, jewellery) → elastic.
- Proportion of income — large share (car, rent) → more elastic; trivial share (salt) → inelastic.
- Time period — demand becomes more elastic over time as consumers adjust and find alternatives.
- Habit/addiction — cigarettes, alcohol → inelastic; consumers struggle to reduce consumption.
PED and Total Revenue
| Price change | Elastic (|PED|>1) | Inelastic (|PED|<1) |
|---|---|---|
| Price rise | Revenue falls | Revenue rises |
| Price fall | Revenue rises | Revenue falls |
Key Takeaways
- PED = %ΔQd ÷ %ΔP — always negative; use |PED| for comparisons.
- |PED| > 1: elastic (responsive). |PED| < 1: inelastic (unresponsive).
- Determinants: substitutes, necessity, income share, time, addiction.
- Inelastic demand: price rise → revenue rises. Elastic: price rise → revenue falls.