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.

**Types Of Price Elasticity Of Demand:**

**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

**Addictive / Habit forming:**

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