What is the formula?
PED = % Change in Demand / % Change in Price
% Change in Demand = PED x % Change in Price
% Change in Price = PED x % Change in Demand
What is the definition?
Price Elasticity of Demand (PED) shows the responsiveness of demand to price change, illustrated as a ratio. For example, a PED of -0.4 (or -0.4:1) means that for every 1% increase in price, there’s a 0.4% decrease in demand.
Advantages of Using Price Elasticity of Demand (PED)
Set the right pricing strategy.
- Easily generate sales revenue and grow market share.
- Achieve economies of scale, thus a competitive advantage.
- Increase the barriers to entry.
Encourage the business to differentiate its products/services.
- Reduce price elasticity.
- Maintain or grow market share.
- Maintain or grow sales revenue.
Disadvantages of Using Price Elasticity of Demand (PED)
Assumes all other factors affecting demand stay the same
- Results in inaccurate predictions due to ignoring changes e.g., incomes.
- Increases the risk of poor pricing strategy decisions.
- Could impact sales revenue and market share.
Difficult to measure i.e., data availability, data quality, market changes.
- Inefficient resource allocation e.g., increasing production.
- Could lead to excess stock in warehouses.
- Increase warehousing costs and reduce operational profits.
Is it a good idea to use the price elasticity of demand?
- Ultimately, it depends on whether the data is accurate and consistent to ensure the right pricing and investment decisions are made.
- Ultimately, it depends on whether the PED was recently calculated to determine its reliability in making decisions today.
- Ultimately, it depends on whether or not they can afford to make the wrong decision at the right time.
Past Paper Questions on Price Elasticity of Demand (PED)
Edexcel A-Level Business
A-Level Paper 1 – May 2020 – Question 2a
In 2019, the price of a Ford Endeavour rose from 30m Rupee to 30.9m Rupee. Using this data and the information from Extract D, calculate the percentage change in quantity demanded for the Ford Endeavour in 2019. State your answer to two decimal places. You are advised to show your working. [4 marks]
AS-Level Paper 1 – May 2019 – Question 2c
At the start of 2016, Beaverbrooks sold 600 Omega Seamaster watches. By 2017 this had increased to 690. Beaverbrooks calculated that the PED for this product was -0.8. Calculate, to 2 decimal places, the percentage fall in the price of an Omega Seamaster watch. [4 marks]
AQA A-Level Business
Unfortunately, we were unable to find any past paper questions on PED for AQA A-Level Business from 2017 to 2022. While there weren’t any questions directly relating to PED, there could be in future papers.
Free Worksheets for Price Elasticity of Demand (PED)
Knowledge Worksheet
This worksheet intends to assess your knowledge and understanding of the concept of PED, the factors that determine a product’s PED, and the impact different PEDs have on sales revenue.
Calculation Worksheet
This worksheet has four questions. Each question requires students to practice calculating percentage change and PED in various orders to identify the change in price or quantity.
Scenario Worksheet
This worksheet is demanding, which is great for challenging yourself. There are two scenarios and both of them require you to correctly calculate the percentage change on profits.
Knowledge File
This document contains questions with answers in an attempt to explain PED. Read through it and condense it all into a paragraph of 6 to 8 sentences.
