1. What is Price Elasticity of Demand?

Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to changes in price. It indicates how much the quantity demanded changes when the price changes by 1%.

2. How Does the Calculator Work?

The calculator uses the Arc Elasticity formula:

Where:

• \( PED \) — Price Elasticity of Demand
• \( \Delta Q \) — Change in quantity demanded
• \( Q_{avg} \) — Average quantity
• \( \Delta P \) — Change in price
• \( P_{avg} \) — Average price

Explanation: This arc elasticity formula calculates elasticity between two points on the demand curve using average values to provide a more accurate measure.

3. Importance of PED Calculation

Details: Understanding price elasticity helps businesses set optimal pricing strategies, predict revenue changes, and understand consumer behavior in response to price fluctuations.

4. Using the Calculator

Tips: Enter the change in quantity, average quantity, change in price, and average price. All values must be valid (average quantity and price must be greater than zero).

5. Frequently Asked Questions (FAQ)

Q1: What do different PED values mean?
A: |PED| > 1 = elastic demand, |PED| < 1 = inelastic demand, |PED| = 1 = unitary elastic, |PED| = 0 = perfectly inelastic, |PED| = ∞ = perfectly elastic.

Q2: Why use arc elasticity instead of point elasticity?
A: Arc elasticity provides a better measure when calculating elasticity between two points, as it uses average values to avoid bias toward either point.

Q3: What factors affect price elasticity?
A: Availability of substitutes, necessity vs luxury, time period, proportion of income spent, and brand loyalty.

Q4: How is PED used in business decisions?
A: Pricing strategies, revenue forecasting, tax incidence analysis, and understanding market competition.

Q5: Can PED be positive?
A: Typically PED is negative due to the inverse relationship between price and quantity demanded, but we often use absolute value for interpretation.