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Home » Igcse Economics Revision Notes » Price Elasticity Of Demand

# Price Elasticity Of Demand

Price Elasticity Of Demand, measures the responsiveness of demand to a change in price.

The formula used to calculate (PED) is:

Q1 = Old Quantity

Q2 = New Quantity

P1 = Old Price

P2 = New Price

If the answer using the above formula is less than 1 than the product has price inelastic demand

however, if the answer is greater than 1 than the product has price elastic demand.

Price Elastic Demand: When demand changes by a greater percentage than the changes in price.

Price Inelastic Demand: When demand changes by a smaller percentage than the changes in price.

### Revenue Maximization By Using Price Elasticity Of Demand:

Revenue: Total reward of producing goods and services.

Formula:

• Price/unit × Quantity produced /demanded
• Total cost + Total profit

The above diagrams show that:

If demand is inelastic, producers must charge high prices in order to maximize revenue.

If demand is elastic, producers must charge low price in order to maximize revenue.

### Factors Affecting Price Elasticity Of Demand:

#### Availability Of Substitutes:

Substitutes more available      PED will be elastic

Less substitutes available         PED will be in elastic

#### Proportion Of Income Spent:

Small proportion (e.g. salt)        PED will be inelastic

Large proportion (e.g. car)         PED will be elastic

Nature Of Product:

Need (e.g. bread)       PED will be inelastic

Luxuries (e.g. car)       PED will be elastic

Cigarettes are addictive thus it will have inelastic PED.

#### Fashion and Trend:

In fashion             PED will be elastic

Out of fashion     PED will be inelastic