PEDstands for the Price Elasticity of Demand.This measures how responsive demand is for a product or service in relation to a change in price.
The general formula for calculating the PED of a product is:PED = % change in quantity demanded / % change in price.
· To work out a % change = new-original / original value
Once you have calculated the number for the PED, it is useful and important to know what the values mean...
If the PED= 0… we say demand is perfectly inelasticin that demand won’t change at all if prices are changed. On a graph, the demand curve would therefore be vertical.
If the PED < 1…then demand is inelasticas the demand changes by a smaller amount than the price changes.
If the PED is = 1…. Then demand is unit elasticso the % change in demand will be exactly the same as the % change in price.
If the PED > 1…. Then demand is elastic, so the demand will respond and change more than the price has changed by and hence price hugely impacts on demand.
(For elasticises, a great tip to use when remembering formulas is that price/income changes are always on the bottom of the equation)
I can now draw some graphs to help show the PED on a simple demand and supply curve.