What this lesson teaches
I can calculate PED, say what the value means, and draw demand curves with different elasticities.
Syllabus K343, 2.6.2. Calculation of PED: calculation of PED using the formula; interpretation of the significance of the PED value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic; drawing and interpretation of demand curve diagrams to show different PED
Make a guess
Good A has a PED of -2. Good B has a PED of -0.5. Which has the more price elastic demand?
- Neither, because both numbers are negative.
- Good A, because 2 is bigger than 0.5.
- Good B, because -0.5 is the bigger number.
Show the answer
Good A, because 2 is bigger than 0.5.
Ignore the minus sign and compare the size. A PED of -2 means quantity changes twice as much as price, so it is elastic.
Above 1 is elastic, below 1 is inelastic, exactly 1 is unitary, 0 is perfectly inelastic.
Ignoring the sign, a PED value between 0 and 1 means demand is price inelastic. Quantity demanded changes by a smaller percentage than price. A value greater than 1 means demand is price elastic: quantity changes by a larger percentage than price.
Unitary elasticity is exactly 1: quantity changes by the same percentage as price. Perfectly inelastic demand is 0: quantity does not change at all when price changes.
Perfectly elastic demand is infinite. Any rise in price above the current level makes quantity demanded fall to zero.
On a diagram, draw inelastic demand as a steep curve and elastic demand as a flat curve. Perfectly inelastic demand is a vertical line. Perfectly elastic demand is a horizontal line.
- Inelastic
- 0 < PED < 1 (ignoring the sign): steep demand curve.
- Elastic
- PED > 1: flat demand curve.
- Unitary
- PED = 1.
- Perfectly inelastic / elastic
- PED = 0, vertical line / PED infinite, horizontal line.
| PED (ignoring sign) | Description | Demand curve |
|---|---|---|
| 0 | Perfectly inelastic | Vertical |
| Between 0 and 1 | Inelastic | Steep |
| 1 | Unitary | - |
| Greater than 1 | Elastic | Flat |
| Infinite | Perfectly elastic | Horizontal |
Worked example: Interpreting values in an answer
A table gives PED values for three goods. Here is how to interpret each.
- Insulin, PED = 0: perfectly inelastic. Patients buy the same amount whatever the price.
- Rice, PED = -0.3: inelastic. A 10% price rise cuts quantity demanded by only 3%.
- A particular brand of sneakers, PED = -2.5: elastic. A 10% price rise cuts quantity demanded by 25%.
- Compare the size of the number, not the minus sign.
Watch out for this
A PED of -2 is less elastic than -0.5 because -2 is the smaller number.
Compare the size, ignoring the sign. 2 is bigger than 0.5, so a PED of -2 is more elastic.
Check your understanding
A good has a PED of -1.4. What does this mean?
- Demand is elastic: a 10% price rise cuts quantity demanded by 14%.
- Demand is unitary, because the value is close to 1 once the sign is ignored.
- Demand is inelastic, because a negative value means buyers barely respond.
Show the answer
Demand is elastic: a 10% price rise cuts quantity demanded by 14%.
Right. The value is greater than 1, so quantity responds more than price.
Check your understanding
When its price goes up by 5%, a good's quantity demanded responds with a PED of -0.4. By how much does quantity change?
- It falls by 12.5%
- It falls by 20%
- It rises by 2%
- It falls by 2%
Show the answer
It falls by 2%
Right. % change in quantity = PED x % change in price = -0.4 x 5 = -2%.