Price elasticity of demand (PED)

Price elasticity of demand (PED) shows how much the price change impacts the demand for a product or service. It helps businesses and policymakers make informed decisions about pricing strategies. 

It is calculated by dividing the percentage change in quantity by the percentage change in price. For example, an airline lowers the cost of a one-way ticket from $100 to $80 (a 20 percent decrease). As a result, the number of tickets sold increases from 1,000 to 1,400 (a 40 percent increase). Dividing 40 by 20 results in 2.

A PED of greater than 1 indicates an elastic product. Here, a slight price decrease can lead to a significant increase in the quantity demanded, potentially increasing total revenue.

Conversely, a PED of less than 1 indicates an inelastic product. In this case, price changes have little effect on the quantity demanded.