Chapter-8

PRICE ELASTICITY OF DEMAND (PED)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 Definition: Price Elasticity of Demand (PED) measures the responsiveness of
quantity demanded due to the change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐃𝐞𝐦𝐚𝐧𝐝𝐞𝐝 (𝐐𝐃)
PED = 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 (𝐏)

NOTE:

𝐍𝐞𝐰 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲−𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲

• % ∆ QD = × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲

𝐍𝐞𝐰 𝐏𝐫𝐢𝐜𝐞−𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞

•%∆ P= × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞

• Ignore the minus sign.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

• If PED is greater than (>) 1, it is price elastic.
When PED is greater than 1, Quantity Demanded will change more proportionately
due to a change in price.

• If PED is less than (<) 1, it is price inelastic.

When PED is less than 1, Quantity Demanded will change less than proportionately
due to a change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 Example - 1
If the price of a product falls by 20% and quantity demanded
increases by 30%, Calculate the PED.

% ∆ 𝐐𝐃
PED =
%∆𝐏
𝟑𝟎%
=
𝟐𝟎%
= 1.5 (>1) [Price Elastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 Example - 2
If the price of a product falls from Tk.20 to Tk.15, the quantity
demanded increases from 100 to 150 units.

𝐍𝐞𝐰 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲−𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲

• % ∆ QD = × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲
𝟏𝟓𝟎 − 𝟏𝟎𝟎
= 𝟏𝟎𝟎 × 𝟏𝟎𝟎
= 50 units.

𝐍𝐞𝐰 𝐏𝐫𝐢𝐜𝐞−𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞

• %∆P= × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞
𝟏𝟓 − 𝟐𝟎
= 𝟐𝟎 × 𝟏𝟎𝟎
= - 25

𝟓𝟎
= = - 2 (> 1) [Price elastic]
−𝟐𝟓

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 Example - 3
Calculate the PED.

Price Quantity
Old 20 100
New 25 90

𝟗𝟎 − 𝟏𝟎𝟎
• % ∆ QD = × 𝟏𝟎𝟎
𝟏𝟎𝟎
= - 10

𝟐𝟓 − 𝟐𝟎
• %∆P= × 𝟏𝟎𝟎
𝟐𝟎
= 25

−𝟏𝟎
=
𝟐𝟓
= - 0.4 (< 1) [Price inelastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

Example - 4
Calculate the PED.
Price Quantity
Old 20 100
New 15 125

𝟏𝟐𝟓 − 𝟏𝟎𝟎
% ∆ QD = × 𝟏𝟎𝟎
𝟏𝟎𝟎
= 25

𝟏𝟓 − 𝟐𝟎
• %∆P= × 𝟏𝟎𝟎
𝟐𝟎
= - 25
𝟐𝟓
=
− 𝟐𝟓
= - 1 (= 1) [Unit elastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

Example - 5
Calculate the PED.

Price Quantity
Old 20 100
New 80 100

𝟏𝟎𝟎− 𝟏𝟎𝟎
• % ∆ QD = × 𝟏𝟎𝟎
𝟏𝟎𝟎
=0

𝟖𝟎 − 𝟐𝟎
• %∆P= × 𝟏𝟎𝟎
𝟐𝟎
= 300

% ∆ 𝐐𝐃
• PED =
%∆𝐏
𝟎
=
𝟑𝟎𝟎
= 0 (< 1) [perfectly inelastic]
AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8
Example - 6
Calculate the PED.
Price Quantity
Old 30 0
New 25 70

= ∞ [perfectly elastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

□ Interpretation of the value of PED

1) If PED > 1 Price Elastic Demand

It means quantity demanded responds more than proportionately to a change in price. For example, luxury items.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

2) If PED < 1 Price Inelastic Demand
It means quantity demanded responds less than
proportionately to a change in price. For example: Necessity
goods.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

3) If PED = 1 Unit Elastic Demand
It means quantity demanded responds proportionately to
change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

4) If PED = 0 Perfectly Inelastic Demand
It means quantity demanded does not respond to a change in
price.
For example: goods with no close substitute.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

5) If PED = ∞ Perfectly Elastic Demand
It means quantity demanded is completely sensitive to the
price at this point; any price increase causes demand to fall to
zero. For example: Goods with perfect substitutes.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

□Factors Influencing Price Elasticity of Demand:
1) Availability of Substitutes - Demand for a product will be elastic if close substitutes are available. As
an increase in price will cause people to switch to the substitute, while a fall in price will attract
consumers away from the substitute. Lack of close substitutes means demand is inelastic as people have
no choice to switch to another good.
2) Degree of necessity - Demand for necessity good is inelastic as people need to consume these goods
in their day to day life. eg, food, petrol, etc. However, demand for luxury good is elastic as people can
postpone purchasing such items and wait for prices to fall. eg, iPhones.
3) Habit forming goods - These are goods to which people become addicted to, and therefore, usually
have highly inelastic demand. eg, cigarettes.
4) Proportion of income spent - If we spend a very small portion of our income on a particular product, a
rise in price will not affect us much and as a result, demand for it will be inelastic. For example, a box of
match, pens, etc.
5) Time: In the short term, goods have inelastic demand because it can often take time for consumers to
find substitutes when price rises. For example, in the long term consumers can search for substitutes and
switch.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

□ Total Revenue
Definition: Revenue is the income generated through sales.

Total Revenue = Price × Quantity

Price Quantity Total Revenue

20 100 2,000
15 150 2,250

% ∆ 𝐐𝐃
• PED = × 𝟏𝟎𝟎
%∆𝐏

𝟏𝟓𝟎 − 𝟏𝟎𝟎
𝟏𝟎𝟎
× 𝟏𝟎𝟎
= 𝟏𝟓 − 𝟐𝟎
𝟐𝟎
×𝟏𝟎𝟎
𝟓𝟎
=
−𝟐𝟓
= -2 (> 1) [Price elastic]
AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8
Price Quantity Total Revenue
20 100 2,000
25 40 1,000

% ∆ 𝐐𝐃
• PED = × 𝟏𝟎𝟎
%∆𝐏

𝟏𝟎𝟎 − 𝟒𝟎
𝟏𝟎𝟎
× 𝟏𝟎𝟎
= 𝟐𝟓 − 𝟐𝟎
×𝟏𝟎𝟎
𝟐𝟎
𝟔𝟎
=
𝟐𝟓
= 2.4 (>1) [Price elastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 □ If a good has Price Elastic Demand:
When, Price ↑ Total Revenue ↓
Price ↓ Total Revenue ↑

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

Price Quantity Total Revenue
20 100 2,000
25 90 2,250

% ∆ 𝐐𝐃
PED = × 𝟏𝟎𝟎
%∆𝐏

𝟗𝟎 − 𝟏𝟎𝟎
𝟏𝟎𝟎
× 𝟏𝟎𝟎
= 𝟐𝟓 − 𝟐𝟎
×𝟏𝟎𝟎
𝟐𝟎
−𝟏𝟎
=
𝟐𝟓
= -0.4 (<1) [Price inelastic]

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 □ If a good has Price Inelastic Demand:
When, Price ↑ Total Revenue ↑
Price ↓ Total Revenue ↓

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

Q:1) Assess if the The demand for rice is price inelastic; whereas, the demand for ice-cream is price
elastic.
Ans: The demand for rice is likely to be price inelastic compared to ice-cream, which tends to be elastic
in demand. This is because rice is a necessity good, and so when price increases, quantity demanded
falls less than proportionately. Whereas, ice-cream is a luxury good that people can live without
consuming. So, as price rises, quantity demanded will fall more than proportionately.

However, there are some substitutes for rice, which people can switch to if prices go up too much. For
example, flour, noodles. Ice-cream may also be inelastic in demand for those who have developed a
habit of consuming it. Overall, substitutes for rice exist but in spite of it, it is likely to be less elastic than
ice-cream because it is more essential.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

Q:2) Evaluate how does PED help firms to take decision?
Ans: Price elasticity of demand helps firms to determine the pricing which will maximize
their total revenue. If the demand for a product is elastic then reducing prices will increase
revenue since quantity demanded will respond more than proportionately to a change in
price.
If the demand for a particular product is price inelastic, then increasing the price will
increase the total revenue since quantity demanded responds less than proportionately to a
change in price.

However, pricing decisions may also be influenced by other factors such as firms reducing
prices to gain more market share, irrespective to PED. Similarly, changes in cost of
production or entering new market also affect a firm's pricing decision. Therefore, PED is
important, but not the only factor determining a firm's pricing strategy.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8

 THE END

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 8