Cambridge International as and a level Economics Ebook

Price elasticity of demand (PED): 
a numerical measure of 
the responsiveness of the quantity demanded to a change in 
price of a product.
KEY TERM
44
Cambridge International AS Level Economics

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from 1,000 to 990, whereas the quantity demanded 
of product B falls from 1,000 to 900. By putting these 
values into the PED equation we can calculate the price 
elasticity of demand.
Product A
% change in quantity demanded of A
% change in price of A
=
=
−
+
−
1
5
0 2
%
%
( ) .
Product B
% change in quantity demanded of B
%change in price of B
= −
+
= −
10
5
2 0
%
%
( ) .
Notice that in both cases a negative fi gure is given. Th
is is 
because of the negative (or inverse) relationship between 
price and quantity demanded; as the price goes up, the 
quantity demanded goes down. Economists conventionally 
refer to PED in absolute terms by ignoring the negative sign.
In the case of product A, because the numerical value 
(0.2) is less than 1, we say that the demand for this product 
is relatively inelastic or unresponsive to price changes. 
Over this particular range of prices, the 5% increase has 
resulted in a much smaller change in quantity demanded.
In the case of product B, because the numerical value (2.0) 
is greater than 1, we say that the demand for this product 
is relatively elastic or responsive to price changes. Over this 
particular range of prices, the same 5% price change has 
caused a much bigger change in quantity demanded.
TOP TIP
It is accepted practice to ignore the minus sign when 
considering estimates of price elasticity of demand.