What is the formula for Price Elasticity of Demand (PED)?

What is the formula for Price Elasticity of Demand (PED)?

• A. percent change in price/percent change in quantity demanded
• B. percent change in quantity demanded/percent change in price
• C. ratio of price to quantity demanded
• D. percent change in quantity demanded per unit time

Answer: (B)

Price Elasticity of Demand measures how strongly buyers respond to price changes. It is defined as the percentage change in quantity demanded divided by the percentage change in price. Using percentage changes lets us compare different goods and price levels without being tied to any particular units. The sign matters because price and quantity demanded move in opposite directions, so PED is typically negative. The magnitude tells how responsive demand is: a value with absolute value greater than 1 means demand is elastic (big response to price changes), less than 1 means inelastic (small response), and equal to 1 means unit elastic. For example, if the price rises by 10% and quantity demanded falls by 10%, PED = (-10%)/(+10%) = -1, indicating unit elasticity. If price rises by 20% and quantity falls by 4%, PED = (-4%)/(+20%) = -0.2, which is inelastic. If price rises by 10% and quantity falls by 30%, PED = (-30%)/(+10%) = -3, indicating elastic demand. Choosing the order in the ratio is important: it must be percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Demand measures how strongly buyers respond to price changes. It is defined as the percentage change in quantity demanded divided by the percentage change in price. Using percentage changes lets us compare different goods and price levels without being tied to any particular units.

The sign matters because price and quantity demanded move in opposite directions, so PED is typically negative. The magnitude tells how responsive demand is: a value with absolute value greater than 1 means demand is elastic (big response to price changes), less than 1 means inelastic (small response), and equal to 1 means unit elastic.

For example, if the price rises by 10% and quantity demanded falls by 10%, PED = (-10%)/(+10%) = -1, indicating unit elasticity. If price rises by 20% and quantity falls by 4%, PED = (-4%)/(+20%) = -0.2, which is inelastic. If price rises by 10% and quantity falls by 30%, PED = (-30%)/(+10%) = -3, indicating elastic demand.

Choosing the order in the ratio is important: it must be percentage change in quantity demanded divided by the percentage change in price.