PED
% change in Qd ÷ % change in P — responsiveness of demand to price.
PED, YED and XED
Key definitions
PES
% change in Qs ÷ % change in P.
YED
% change in Qd ÷ % change in income.
XED
% change in Qd of A ÷ % change in P of B.
Elastic demand
PED between -1 and -∞ — Qd responsive to price.
Inelastic demand
PED between 0 and -1.
Unit elastic
PED = -1.
Normal good
Positive YED — demand rises as income rises.
Inferior good
Negative YED.
Substitutes
Positive XED.
Complements
Negative XED.
Party Season Nearly Christmas
XED mnemonic: Positive substitutes, Negative complements.
Revenue
Total money from sales; PED determines effect of price changes on TR.
Key concepts
Inelastic PED: price rise increases total revenue. Elastic PED: price rise reduces TR.
Firms and government use PED for tax incidence.
YED helps firms forecast demand when incomes change.
XED mnemonic: Party Season Nearly Christmas — Positive substitutes, Negative complements.
Exam tip: Max and Sanjeeth at a concert — the QUEUE before you PEE (%ΔQ before %ΔP).
Relevant tips
- Show working for all elasticity calculations in exams.
- State Party Season Nearly Christmas when interpreting XED.