A Level Business Studies: Price Elasticity of Demand

Price elasticity of demand (PED) is a measure of the responsiveness of quantity demanded of a product to a change in its price.
It shows how sensitive consumers are to changes in price and helps businesses understand how changes in price will affect their revenue.
PED can be elastic, inelastic or unitary, depending on the degree of responsiveness of demand to price changes.
For example, if a 10% increase in price leads to a 20% decrease in quantity demanded, the PED is 2, which means demand is elastic.
If a 10% increase in price leads to only a 2% decrease in quantity demanded, the PED is 0.2, which means demand is inelastic.
If a 10% increase in price leads to a 10% decrease in quantity demanded, the PED is 1, which means demand is unitary.
The formula for Price Elasticity of Demand (PED) is given below

\frac{\% \Delta Quantity Demanded}{\% \Delta Price} = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}

Elastic demand: when a small change in price results in a large change in quantity demanded. For example, luxury goods such as expensive sports cars or designer clothing.
Inelastic demand: when a large change in price results in a small change in quantity demanded. For example, basic necessities such as food and medicine.
Unitary demand: when a change in price results in an equal percentage change in quantity demanded.

It is always negative because price and quantity demanded are inversely related.
PED ranges from zero to infinity.
PED is influenced by the availability of substitutes, the necessity of the product, the proportion of income spent on the product, and time.
Products with close substitutes tend to have more elastic demand.
Products that are necessities tend to have less elastic demand.
Products that require a high proportion of income tend to have more elastic demand.
The longer the time period, the more elastic the demand becomes.
PED varies along the demand curve, with demand being more elastic at higher prices and less elastic at lower prices.
PED varies by market segment, with different consumers having different levels of price sensitivity.
PED is affected by changes in income and consumer preferences.

Helps businesses understand how changes in price affect revenue and profits.
Helps businesses make pricing decisions that maximize revenue and profits.
It helps businesses identify which products have more price flexibility than others.
Helps businesses anticipate how competitors might respond to price changes.
Helps businesses forecast sales and plan production levels.
Helps businesses allocate resources effectively.
Helps businesses develop effective marketing strategies.
Helps businesses assess the impact of taxes or subsidies on consumer behaviour.

Helps businesses make informed pricing decisions.
Helps businesses identify opportunities to increase revenue and profits.
Helps businesses understand the sensitivity of demand to price changes, which can inform marketing strategies.
Helps businesses make better forecasting and planning decisions.
Helps businesses allocate resources effectively.
Helps businesses stay competitive in the market.
Helps businesses avoid pricing strategies that may result in losses.
Helps businesses assess the effectiveness of promotional activities.

PED may not accurately reflect changes in demand when consumers have no close substitutes.
PED may not be accurate for products with long life spans or for products that are not frequently purchased.
PED assumes that other factors affecting demand remain constant, which may not always be the case.
PED may vary across different market segments, making it difficult to make broad pricing decisions.
PED may not be able to predict consumer behaviour accurately in all situations.
PED does not take into account the costs associated with changing prices.