What is Price Elasticity of Demand (PED)? Definition & Examples

📚 Quick Study Guide

🔍 Definition: Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price. ➕ Formula: $PED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Price}$ 📉 Elastic Demand: PED > 1 (Quantity demanded is highly responsive to price changes). ⬆️ Inelastic Demand: PED < 1 (Quantity demanded is not very responsive to price changes). ↔️ Unit Elastic Demand: PED = 1 (Percentage change in quantity demanded is equal to the percentage change in price). ⏳ Perfectly Elastic Demand: PED = ∞ (Any price increase will cause demand to drop to zero). 🚫 Perfectly Inelastic Demand: PED = 0 (Quantity demanded does not change regardless of price change). 💡 Factors Affecting PED: Availability of substitutes, necessity vs. luxury, proportion of income spent on the good, and time horizon.

🧪 Practice Quiz

1. What does Price Elasticity of Demand (PED) measure?
   1. The responsiveness of price to changes in quantity demanded.
   2. The responsiveness of quantity demanded to changes in price.
   3. The total revenue generated from sales.
   4. The cost of producing a good or service.
2. If the PED for a product is 2.5, the demand is considered:
   1. Inelastic
   2. Unit elastic
   3. Elastic
   4. Perfectly inelastic
3. Which of the following goods is most likely to have inelastic demand?
   1. Luxury cars
   2. Basic medicine
   3. Restaurant meals
   4. Designer clothing
4. If a company increases the price of its product by 10% and the quantity demanded decreases by 5%, what is the PED?
   1. 0.5
   2. 2
   3. -0.5
   4. -2
5. What does it mean if the PED is equal to 0?
   1. Demand is perfectly elastic.
   2. Demand is unit elastic.
   3. Demand is perfectly inelastic.
   4. Demand is elastic.
6. Which factor typically makes demand more elastic?
   1. Few substitutes available.
   2. The good is a necessity.
   3. A short time horizon.
   4. Many substitutes available.
7. A product with a PED of 1 is said to have:
   1. Perfectly elastic demand
   2. Perfectly inelastic demand
   3. Unit elastic demand
   4. Elastic demand