Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult
The allocation of resources - Price elasticity of demand (PED) (1 questions)
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Answer:
PED = ((Q2 - Q1) / Q1) / ((P2 - P1) / P1)
Where:
- Q1 = Initial quantity demanded = 2000
- Q2 = New quantity demanded = 1600
- P1 = Initial price = £400
- P2 = New price = £450
PED = ((1600 - 2000) / 2000) / ((450 - 400) / 400)
PED = (-400 / 2000) / (50 / 400)
PED = (-0.2) / (0.125)
PED = -1.6
The Price Elasticity of Demand (PED) is -1.6. This indicates that demand is relatively elastic. A 1% increase in price leads to a 1.6% decrease in quantity demanded.