Price Elasticity of Demand (PED) Method Price elasticity of demand (PED) measures the responsiveness of demand to a change in price. The formula for calculating PED is: PED = Percentage change in quantity demanded Percentage change in price In order to work out a percentage change, the following formula is used: Difference between figures x 100 Original figure For example, the price charged by a beauty salon for eyebrow threading is 5. The owner of the salon chooses to increase the price to 7. The number of customers falls from 1 000 per month when the price was at 5 to 800 per month when the price was increased. The following steps are needed to calculate the price elasticity of demand in this example: 1. Calculate the percentage change in demand: 800 1000 = - 200 x 100 = - 20% 1000 2. Calculate the percentage change in price 7 5 = 2 x 100 = 40% 5 1
3. Divide the answer in Step 1 by the answer in Step 2 (the PED formula). Now you have your answer! (PED is a unit free measure, so the answer is just expressed as a number). -20% = - 0.5 40% NB: in the PED examples exercises below, you do not have to use the minus sign for the correct answer. Example 1 A sweet shop increases the price charged for a small bag of sweet from 40p to 45p. Sales fall from 450 000 bags of sweets a year to 375 000 bags of sweets a year. Calculate the PED to 2.d.p. Example 2 Hisham s Hat shop increases the price of their premium hats by 10%, resulting in a decrease in sales by 5%. Calculate the PED. 2
Example 3 A business selling all-inclusive holidays to Spain reduces their price from 1 200 to 1 100. The number of holidays purchased increases from 400 to 500. Calculate the PED Example 4 A business selling luxury pens for 150 increase their price by 10%. They experience a fall in average monthly sales from 3 000 to 2 200 pens. Calculate the PED to 2.d.p. 3
Example 5 Sales for a brand of economy beans sold at a supermarket chain increased from 50 000 to 51 000 per month when the price changed from 35p per tin to 33p per tin. Calculate the PED to 2 d.p. 4
Income Elasticity of Demand (YED) Method Income elasticity is the responsiveness of demand to changes in income. The formula for calculating YED is: YED = Percentage change in quantity demanded Percentage change in income In order to work out a percentage change, the following formula is used: Difference between figures x 100 Original figure For example, the average weekly income rises from 400 to 440 and sales of takeaway pizza increase for a local provider from 1 200 to 1 500 a week. The following steps are needed to calculate the income elasticity of demand in this example: 1. Calculate the percentage change in demand 300 x 100 = 25% 1 200 2. Calculate the percentage change in income 40 x 100 = 10% 400 3. Divide the answer in Step 1 by the answer in Step 2 (the YED formula). Now you have your answer! (YED is a unit free measure, so the answer is just expressed as a number remember with YED to include the minus sign, if appropriate). 25% = 2.5 10% 5
NB: You must include the minus sign, where appropriate, in the examples below. Example 6 Sleep Tight provides luxury hotel rooms in city centres. They found that the demand for their rooms increased by 10% when average incomes rose by 5%. Calculate the YED. Example 7 Incomes increased from 35 000 a year to 36 000 a year in a semi-affluent area. Basic Branded Baked Beans Ltd sells each can of beans for 18p. However, the demand for their beans fell from 1 000 cans a week to 800 cans a week. Calculate the YED. 6
Example 8 Average monthly incomes in a small town decrease by 30 from 1 500. The demand for the local chip shop increases from 1 500 customers a month to 1,600 customers a month. Calculate the YED to 2.d.p. Example 9 Let s say that incomes rise by 3% in the UK. The demand for holidays abroad increase by 5%. Calculate the YED to 2.d.p. 7
Example 10 Weekly incomes increase from 500 to 525. The demand for bread increases from 1 000 loaves a week to 1 050 loaves a week at a local shop. Calculate the YED. 8
Answers Example 1 Example 6 1.33 2 Example 2 Example 7 0.5-7 Example 3 Example 8 3-3.33 Example 4 Example 9 2.67 1.67 Example 5 Example 10 0.35 1 9