The Price elasticity of demand (PED) is the responsiveness of changes in the quantity demanded to changes in the price. It is calculated using the following formula;

The calculation of the PED will produce a value. This value will indicate the characteristics of the PED. For instance;

• Zero (perfectly inelastic) - quantity demanded does not change at all as price changes.
• Between zero and one (inelastic) - quantity demanded changes by a smaller percentage than price
• One (unitary elasticity) - quantity demanded changes by exactly the same percentage as the change in price
• Between one and infinity (elastic) - quantity demanded changes by a larger percentage than does the change in price

Infinity, perfectly elastic, buyers are prepared to purchase all they can obtain at a given price, but none at a higher price.

The following is an example of how to calculate the PED;

Original price = £8
Original quantity = 20 units
New price = £7
New quantity = 25 units

It is evident that a £1 fall in price results in a 5 unit increase in the quantity demanded. The price elasticity of demand is

= -2.00

(note for normal goods the PED will be negative. Therefore, we tend to ignore the sign. In this case the PED is 2.00)

Therefore, the price elasticity of demand is 2.0, which is termed as relatively elastic.