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Price Elasticity of Demand Formula:
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Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to a change in price. It is a key concept in economics that helps businesses and policymakers understand consumer behavior and market dynamics.
The calculator uses the standard PED formula:
Where:
Explanation: The formula calculates how much the quantity demanded changes in response to a 1% change in price. A value greater than 1 indicates elastic demand, while a value less than 1 indicates inelastic demand.
Details: Understanding price elasticity helps businesses set optimal pricing strategies, forecast revenue changes, and make informed decisions about product pricing and promotions.
Tips: Enter the percentage change in quantity and percentage change in price as decimal numbers (e.g., 10% as 10). The calculator will compute the price elasticity of demand.
Q1: What does a PED value of 1.5 mean?
A: A PED of 1.5 means that for every 1% increase in price, quantity demanded decreases by 1.5%, indicating elastic demand.
Q2: What factors affect price elasticity?
A: Factors include availability of substitutes, necessity of the product, proportion of income spent, and time period considered.
Q3: Can PED be negative?
A: While the formula can produce negative values, economists typically use the absolute value since the relationship between price and quantity is inverse.
Q4: What's the difference between elastic and inelastic demand?
A: Elastic demand (|PED| > 1) means quantity is highly responsive to price changes. Inelastic demand (|PED| < 1) means quantity is not very responsive to price changes.
Q5: How is PED used in business decisions?
A: Businesses use PED to determine optimal pricing, predict revenue impacts of price changes, and develop effective sales and marketing strategies.