Price Elasticity of Demand (PED)
Price elasticity of demand measures how much the quantity demanded changes when prices shift. The formula is simple: percentage change in quantity demanded divided by percentage change in price. This helps businesses predict what happens to sales when they adjust their prices.
Elastic demand (PED > 1) means customers are very price-sensitive. Think designer clothes or holidays - bump up the price and sales plummet. These are usually luxury items that people can easily live without.
Inelastic demand (PED < 1) is the opposite. Petrol, milk, and medicine fall into this category because people need them regardless of price increases. Businesses love inelastic products because they can raise prices without losing many customers.
Quick tip: Remember PANTS to identify factors affecting PED - Proportion of income, Addictiveness, Necessity, Time, and Substitutes available.
The sweet spot is unit elastic demand , where a 10% price rise causes exactly 10% fewer sales. Airlines often use elastic pricing - they'll slash ticket prices to fill seats because even small price cuts can dramatically boost demand.
