Understanding how to calculate PED (Price Elasticity of Demand) is crucial for making better business decisions. PED measures how the quantity demanded of a good responds to a change in its price. Here’s a quick guide:
- Identify Variables: Determine the initial and new prices and quantities.
- Use the Formula: PED = (% Change in Quantity Demanded) / (% Change in Price).
- Calculate Percentage Changes:
- % Change in Quantity = (New Quantity – Initial Quantity) / Initial Quantity x 100
- % Change in Price = (New Price – Initial Price) / Initial Price x 100
- Interpret Results:
- PED > 1: Demand is elastic (sensitive to price changes).
- PED < 1: Demand is inelastic (less sensitive to price changes).
- PED = 1: Unit elastic demand.
By understanding PED, businesses can strategically price their products to maximize revenue and make informed inventory decisions.