Price elasticity of demand - is defined as the sensitivity of quantity demand for a product due to a change in its price.
How is PED measured
% change of quantity demand/ price
If answer is >1 means product is highly price sensitive - when price changes the change in QD is proportionatley greater than the price change - PRICE ELASTIC.
E.g. a 10% price fall in strawberries leads to a 20% increase in QD; 20/10 - 2 Therefore price elastic.
Therefore if firms lower price they want it to be price elastic, because their revenue and profits go up due to more QD proportiantley greater than the price change.
If the PED is less than one, the good is inelastic. Demand is not very responsive to changes in price. If for example a 20% increase in price leads to a 5% fall in quantity demanded, the price elasticity = 0.25
- If the PED is equal to one, the good has unit elasticity. The percentage change in quantity demanded is equal to the percentage change in price. Demand changes proportionately to a price change.
- If the PED is equal to zero, the good is perfectly inelastic. A change in price will have no influence on quantity demanded. The demand curve for such a product will be vertical.
- If the PED is infinity, the good is perfectly elastic. Any change in price will see quantity demanded fall to zero. This demand curve is associated with firms operating in perfectly competitive markets