Economics · The allocation of resources. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Price elasticity of demand measures how strongly the quantity demanded of a product responds to a change in its own price. Price and quantity demanded move in opposite directions, so the value is negative. To judge elasticity, look at the size of the number and ignore the minus sign.
If quantity changes by a larger percentage than price, demand is elastic. If it changes by a smaller percentage, demand is inelastic. Demand is more elastic when the product has close substitutes, is a luxury, takes a large share of income, or when buyers have more time to adjust.
PED tells a firm what a price change will do to its revenue, and tells a government how much an indirect tax will raise.
Students turn the formula upside down, or divide the changes in units instead of the percentage changes. Quantity always goes on top, and both changes must be percentages of the original values.
Answer: PED = −1.25 (elastic), and total revenue falls by Rs 4,000.
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