Calculating PED

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Calculating PED

In order to calculate the proportionate change in demand that arises as a result in a change in price, you must use the formula that is set out to calculate PED

Formula for Calculating PED

\[\frac{\[\frac{Change in Q}{.5(Q1 + Q2)}\]}{\[\frac{Change in P}{.5(Q1 + Q2)}\]}\]

Where:

Change in Q = Difference between the original quantity demanded and the new quantity demanded

Change in P = Difference between the original price and the new price

Q1 = Original quantity demanded

Q2 = New quantity demanded

P1 = Original price

P2 = New price

This formula can be simplified to:

(Change in Q) X (P1 + P2)

(Change in P) (Q1 + Q2)

An elasticity coefficient of above 1 means that the good is ELASTIC, whereas

An elasticity coefficient of below 1 means that the good is INELASTIC

For the majority of goods, this coefficient will be a NEGATIVE figure

A PED of -.5 means that, for every 10% increase in price, quantity demanded will decrease by 5%

A PED of -1.5 means that, for every 10% increase in price, quantity demanded will decrease by 15%

Calculating PED