Price Elasticity of Demand (PED)

• The standard formula for calculating PED is:

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

• To calculate the percentage change for either variable, use the formula:

$\% \Delta = \frac{\text{New Value} - \text{Old Value}}{\text{Old Value}} \times 100$

• A more precise method often used to avoid different results when moving up versus down the demand curve is the Midpoint Method, which uses the average of the initial and final values as the denominator for percentage calculations.

Degrees of Responsiveness

• Price Elastic Demand ($|PED| > 1$): The percentage change in quantity demanded is greater than the percentage change in price. Consumers are highly sensitive to price changes.
• Price Inelastic Demand ($|PED| < 1$): The percentage change in quantity demanded is less than the percentage change in price. Consumers are relatively insensitive to price changes.
• Unitary Elasticity ($|PED| = 1$): The percentage change in quantity demanded exactly equals the percentage change in price.
• Perfectly Inelastic ($PED = 0$): Quantity demanded does not change regardless of the price (represented by a vertical demand curve).
• Perfectly Elastic ($PED = \infty$): Any increase in price causes quantity demanded to drop to zero (represented by a horizontal demand curve).

• Total Revenue (TR) is calculated as $P \times Q$. The relationship between price changes and TR depends entirely on the PED of the product.

• For elastic goods, the quantity effect outweighs the price effect. For inelastic goods, the price effect outweighs the quantity effect.

• The Negative Sign: Always remember that PED is technically negative due to the inverse relationship between price and quantity. However, when an exam asks for the 'magnitude' or 'degree' of elasticity, refer to the absolute value.

• Slope vs. Elasticity: Never assume that a constant slope means constant elasticity. On a linear demand curve, elasticity changes at every point, becoming more inelastic as you move down the curve toward the x-axis.

• Sanity Check: If you calculate a PED for a luxury car and get $0.2$, re-check your math. Luxuries should almost always have a PED greater than $1$ in absolute terms.

• Units Matter: Ensure you are using percentage changes, not absolute changes in dollars or units, when applying the primary PED formula.