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:

The formua for PED

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

The value of price elasticity of demand is infinity at the point where the demand curve touches the 'Y' axis and is zero when the demand curve touches the 'X' axis.

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 demand curves

PED variations

It is important for firms to understand variations in price elasticity of demand, and how changes in price affect the volume of sales, and the revenue from selling a given quantity. Data can be gathered from previous prices changes (historical sales data), and as a result of market research.

Gathering and using this data helps the firm increase its knowledge of its market, and thereby reduces information failure. It is important for firms to continually update their information on PED values given that consumer behaviour is constantly changing.

Cross elasticity

What determines cross elasticity of demand?

Cross elasticity
Income elasticity

What are normal and inferior goods?

Income elasticity
Price elasticity

What happens along a unitary demand curve?

Unitary PED

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