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Topic 2 – Elasticities<br />
Price Elasticity of Demand (PED)<br />
You need to be able to:<br />
• Calculate PED using the following equation.<br />
• Calculate PED between two designated points on a demand curve using the PED<br />
equation above.<br />
Calculating PED<br />
Step 1<br />
Calculate the percentage changes in price and quantity demanded.<br />
The change in price is worked out by taking the original price away from the new price and<br />
then dividing that by the original price.<br />
The change in quantity demanded is worked out by taking the original quantity away from<br />
the new quantity and then dividing that by the original quantity.<br />
E.g.<br />
If the quantity demanded of white chocolate Easter eggs falls from 40,000 to<br />
32,000 per year, when the price is increased from $5 to $5.50.<br />
Then the percentage change in price is:<br />
and the percentage change in quantity demanded is:<br />
Step 2<br />
Divide the percentage change in quantity demanded by the percentage change in price, in<br />
order to get the value of the PED.<br />
E.g. In the example above, .<br />
The negative value is usually ignored, but you could get a question that expresses<br />
PED as a negative value and, if you do, then you should do the same.<br />
Calculating the PED between two points on a demand curve<br />
This is really just the same as the above.<br />
Step 1<br />
Identify the price and quantity demanded associated with each point.<br />
Produced by Ian Dorton & Jocelyn Blink Page 11
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