2.

7 Price elasticity of demand (PED)

[Recap]
 What is price elasticity of demand (PED)?
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 What is the formula of PED?
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 Draw PED diagrams when the demand is price…
1) Elastic 2) Inelastic

[Extreme cases of PED]

1. Unit elastic demand
- The percentage change in quantity demanded is _________________ as the percentage change in price.

Eg. A 20% increase in the price of a mobile phone leads to a 20% decrease in quantity demanded. Calculate the PED.
PED =

2. Perfectly inelastic demand

- When a change in price leads to _______________________ in the quantity demanded.

Eg. A 10% increase in the price of a carton of milk leads to no change in quantity demanded. Calculate the PED.
PED =
 3. Perfectly elastic demand
- When a change in price leads to an ______________________________ in the quantity demanded.

Eg. An extremely small increase in the price of oranges sold from a farm leads to the quantity demanded falling to
zero from infinity. Calculate the PED.
PED =
Question % change in price % change in Qd Elasticity Type of elasticity
A -10 20
B 50 -25
C -7 28
D 9 -9
E -15 0

[Determinants of PED] *Remember SPLAT !!!!

S–
P–
L–
A–
T–
1. Substitutes – number & closeness
- If there are more substitutes and if they are closer to each other, PED is more __________________.
Eg. (Pepsi and Coke) vs. (Train and Car)

2. Proportion of income
- If a good/service has a very low price and is a small proportion of consumers’ income, PED is more ________.
Eg. a pen vs. a car

3. Luxury or necessity
- If a good/service is considered a luxury, PED is more ________________. Eg. Bread vs. Rolex

4. Addiction
- If a good/service is more addictive, PED is more __________________. Eg. cigarettes
5. Time: In the short run, PED is more ________________. Eg. oil  renewable energy