Price Elastic vs Price Inelastic Demand
The price elasticity value, also known as the coefficient, indicates whether demand is relatively price inelastic or price elastic. This distinction is crucial in understanding price elasticity of demand in A Level microeconomics.
Definition: Price elastic demand means quantity demanded is relatively sensitive to price changes, while price inelastic demand means quantity demanded is relatively insensitive to price changes.
For example, if a 10% increase in price results in a 5% fall in quantity demanded, the demand is considered relatively inelastic. The PED value in this case would be -0.5.
Example: When PED = -5% / +10% = -0.5, it indicates relatively inelastic demand.
Understanding price elasticity is vital for firms because it directly impacts their total revenue. Total revenue is calculated by multiplying the price received for the product by the quantity demanded (TR = P x Qd).
When demand is relatively price inelastic:
• An increase in price leads to a rise in total revenue
• A fall in price leads to a fall in total revenue
Conversely, when demand is relatively price elastic:
• A rise in price leads to a fall in revenue
• A fall in price leads to an increase in revenue
Highlight: The impact of price changes on total revenue depends on whether demand is elastic or inelastic, which is crucial knowledge for businesses in setting pricing strategies.
