The PED is used to illustrate how the demand for a good will change for a given change in price. This is very useful for identifying the likely impacts on both consumers and producers.

A PED value of 0.3 can be interpreted as follows, a 1% increase in the price of the good will result in a 0.3% decrease in the demand for the good. Alternatively, a PED value of 1.5 implies that a 1% increase in the price of a good will result in a fall of 1.5% in the quantity demanded. It is clear that with an inelastic demand (PED = 0.3) then the change in the quantity demanded changes by proportionately less than the change in the price.

The PED is used to illustrate the slope of the demand curve. For instance,

PED 0.3

PED 2

A PED which is inelastic is represented by a very steep demand curve. Where any change in the price will always be proportionately larger than the change in quantity.

A PED which is elastic is represented by a very flat (shallow) demand curve. Where a change in the price will always be proportionately smaller that the change in quantity.

Interpreting the PED for consumers

Economists tend to suggest that the consumer wishes to maximise their utility by consuming the largest number of the highest quality goods at the lowest price.

A method of illustrating how the welfare of the consumer will change for a change in price with different price elasticities of demand is the concept of consumer surplus.

If the PED is relatively inelastic (less than one) then the quantity demanded will decrease by proportionately less than the price rise. Therefore, the consumer is worse of, as their total expenditure increases and they consume fewer goods. However, if the PED is elastic then the rise in price will result in a proportionately larger fall in the quantity demand, therefore, the consumer will be worse off.

Interpreting the PED for producers

Economists assume that the aim of producer is to maximise their profit, when profit is calculated as total revenue minus total cost.

The value of the PED can be used to identify the consequences on the firm's total revenue.

For a given increase in price, if the PED is relatively inelastic (PED = 0.2) then the increase in price is proportionately larger than the decrease in quantity. If this occurs then total revenue will increase. However, if the PED is relatively elastic (PED = 2.0) then the increase in the price is proportionately smaller than the decrease in quantity. If the occurs, then the total revenue for the firm will increase.