Definition of PED

The Allocation of Resources – Price Elasticity of Demand (PED)

Definition of PED

Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes when its price changes. It tells us whether consumers are price sensitive or not.

Think of it like this: If the price of your favourite snack rises, will you buy much less, or will you still buy almost the same amount? PED captures that reaction.

Quick Example with Emojis

📦 Product: Ice Cream 🍦 📈 Price increases by 20% (from $2 to $2.40) 📉 Quantity demanded falls by 10% (from 100 units to 90 units)

$${\displaystyle PED = \frac{10\%}{20\%} = 0.5}$$

Since 0.5 < 1, demand is inelastic – people still buy a lot of ice cream even when it’s more expensive.

Analogy: The “Elastic Band”

Imagine an elastic band stretched between your fingers.

• 🔧 Elastic demand: The band snaps back quickly – quantity changes a lot when price changes.
• 🧱 Inelastic demand: The band is stiff – quantity hardly changes even if price changes.