C) Interpretation of numerical values of price elasticity of demand

The idea

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. The numerical value of PED is always negative due to the inverse relationship between price and quantity demanded, though the minus sign is often ignored. A PED value between 0 and -1 indicates price inelastic demand, where the percentage change in quantity demanded is less than the percentage change in price (e.g. -0.5). A value less than -1 (e.g. -2.0) indicates price elastic demand, where quantity demanded is highly responsive to price changes. A value of exactly -1 represents unitary elasticity. Interpreting these values allows businesses to predict the impact of price changes on total revenue.

What earns the marks

• Identify that a PED value between 0 and -1 signifies price inelastic demand.
• Identify that a PED value less than -1 (e.g. -1.5) signifies price elastic demand.
• Recognise that a PED of exactly -1 indicates unitary price elasticity.
• Explain that a PED of 0 means perfectly inelastic demand, where quantity demanded does not change when price changes.
• Explain that perfectly elastic demand is represented by a PED of infinity.

Common mistakes and how to put them right

• Assuming a positive PED value is normal for most goods.

  Put it right: PED is normally negative due to the law of demand; positive values only apply to exceptional cases like Veblen or Giffen goods.

• Confusing elastic and inelastic numerical ranges, such as thinking -0.5 is elastic.

  Put it right: Values between 0 and -1 are inelastic, while values less than -1 (further from zero) are elastic.

• Ignoring the percentage aspect and interpreting the PED value as an absolute change in units.

  Put it right: PED values represent the ratio of percentage changes, not absolute unit changes.

Exam tips

• Always state whether the demand is elastic or inelastic when given a numerical PED value in an exam question.
• Remember that although the minus sign is often omitted in textbooks, you should recognise that a PED of 2 actually means -2 and is therefore elastic.
• Use the numerical value to determine the effect on total revenue; for example, if PED is -0.4 (inelastic), a price increase will raise total revenue.