Variations in PED

Price elasticity of demand (PED) - which shows the relationship between the price of a product and demand for the product - can vary considerably. It is calculated using the formula:

PED formula

PED can be infinite (perfectly elastic), or zero (perfectly inelastic). PED will increase as the price increases from a low value, as indicated on the demand schedule below.

PED schedule

As price rises, the percentage change in price will fall, and will approach zero.

Graphically, PED will vary at different points on a demand curve, from elastic to inelastic, through 1 as we move down the demand curve.

PED variations

PED and revenue

If we assume that the demand curve is also the average revenue curve* (given that AR = P) we can see that the marginal revenue (MR) curve falls at twice the rate of the average revenue (AR) curve.

MR is at zero when PED on the AR curve equals one – is unit elasticity.

A demand curve with a ‘unit’ PED value over its whole length is called a rectangular hyperbola.

This means that at all points, price times quantity is the same value. As price times quantity equals total revenue, total revenue (TR) is equal at all points.

Video on price elasticity of demand
Why AR equals P

Read more on unitary PED.

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