# Price Elasticity of Demand Formula and Interpretation

In this first lesson on elasticities we’ll learn the definition, formula and interpretations of the price elasticity of demand (PED) coefficient.

Part 1

Part 2

### 9 thoughts on “Price Elasticity of Demand Formula and Interpretation”

1. 1)What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?

The greater the PED coefficient the more responsive consumers are to price changes. In other words the greater the PED coefficient a change in price will have a greater effect in quantity demand in the form of a decrease of quantity demanded

2) The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?

If the PED coefficient were to be 0 this would mean that consumers would show no response to a change in price and the quantity demanded will be the same at all prices. There are not many goods/services in the real world in which this is the case, however substances that cause strong addictions as well as basic necessities of life may have a PED coefficient very close to 0

3) For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?
I would say it depends on where you are in the world. In places where tap water is filtrated and clean consumers may be more responsive to a change in the price of bottled water as there is a substitute for it. However a place in which tap water in undrinkable, consumers will be much less responsive to the price of bottled water as water is essential for life and they would have to purchase it regardless of the price.

2. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?

It is a direct relationship since the responsiveness of consumers increases as the PED coefficient does. Which means that every 1% increase in the price of a good will cause a change in the quantity demanded which is given by the PED coefficient

2. The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?

At a PED of zero demand is “perfectly inelastic” which means that if the PED of a good or service would equal zero consumers are not responsive at all to any price changes. Any change in price is met with no change in quantity demanded. This can be the case if the good is nessecary to live. Especially specific medicine for people with an illness.

3. For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?

Of course it depends on the location. In a country like Switzerland tab water is totally clean and therefore drinkable, which would result in a higher PED of bottled mineral water. The price of table salt though is already relatively low and even price changes of a hundred percentage wouldn’t affect consumers responsiveness by a lot. But in some developing countries, tab water might not be drinkable and therefore mineral bottled water is a necessity, which results in a lower PED. Table salt counts more as luxury and isn’t a necessity. Therefore the PED of table salt would be relatively high

3. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?

– The relationship between the PED coefficient and the responsiveness of consumers to price changes is a direct one. When the PED coefficient increases, the responsiveness of the consumer to price changes will also increase, resulting in a relatively high price elasticity. On the contrary, if the PED coefficient is low, the responsiveness will also be low, resulting in little to no elasticity.

2. The video explains how to interpret the various possible results of the PED calculation.

But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?
A PED coefficient of zero is only attainable if the quantity demanded of the good or service never changes at all, no matter how much of a price change it has undergone. If a good/service/resource has a PED coefficient of zero, it is completely inelastic in all ways. There is no way that there can be an increase or decrease in the responsiveness of demand.

3. For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?

I would think that a consumer would be much more responsive to price changes in bottled mineral water rather than table salt. Bottled mineral water is more of a luxury rather than an necessity, since tap-water is also drinkable, in countries similar to Switzerland of course. Therefore, if the price of mineral water were to alter, consumers would increase or decrease their demand for it respectively. If price were to increase, people would no longer demand the luxury, due to the fact that it is simply not as necessary.
On the other hand, table salt is much more of a necessity. Beyond adding to flavor and taste, it is also a very essential nutrient and contains minerals crucial for the human body. It is impossible to survive without salt. Therefore, whether the price of salt increases or decreases, consumers will continue to demand and consume it. Understandably, if there is a very large increase in price, the demand might slightly decrease, but essentially, there would be much less response to a price change.

4. 1) What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?

If the coefficient of the PED is bigger than 0 but smaller than 1, it is inelastic. This means that consumers don’t respond much to the change in price. If the coefficient of the PED is equal to 1, it is called unit elastic. This means that consumers respond to the change in price according to the percentage change in the price. When the coefficient of the PED is greater than 1, it is elastic. This means that consumers respond highly to the price changes. The closer the coefficient of the PED gets to 0, the less responsiveness from the consumers. The closer it gets to infinity, the greater the responsiveness of the consumers.

2) The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?

The coefficient of a PED can be 0 if the good is mandatory. This means that people will need it whether or not it is expensive (obviously to a certain extent). For example, people need water – therefore, everybody buys water. If the price of water would go down, the amount of consumers wouldn’t go down because everybody already buys water. If the price would go up, the amount of consumers still wouldn’t change because people need water to live. The only situation in which the amount of consumers would go down would be if the price of water rose so high that people wouldn’t be able to afford it. People who would be able to afford water would either die, or have to steal water. Obviously this is highly unlikely but it works as an example.

3) For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?

Both of these goods are regularly used at home. Although water is more important than table salt because it is necessary for humans to survive (as mentioned above), bottled water isn’t. If the price of bottled water would go up, people would simply stop buying it and would just use the water from the tap (that is, only in countries where tap water is drinkable). Table salt however, which people don’t need, but use a lot would be a good to which people would be less responsive to than a good such as bottled water.

5. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?
There is a direct relationship between the PED coefficient and the responsiveness of the consumers to price changes. If the PED coefficient increases the responsiveness of consumers to price changes increases too.

2. The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?
It is very unlikely that the PED coefficient is zero, but theoretically it is possible. An example for this, which is also used in our book is the price of insulin. Insulin is usually demanded by diabetics. If the price of insulin goes up, the consumers will not demand less because they will always need the same amount of insulin, to stay healthy. Same goes for when the price of insulin falls there will not be less quantity demanded than before because, as I said they rely on the medicine to stay healthy.

3. For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?
Here in switzerland I would expect consumers to be more responsive to the change in price of bottled water because bottled water is more of a luxury than a necessity because in Switzerland one can just drink the tap water. In other countries bottled water is more important, for example in China where the water isn’t clean. There, the consumers are less responsive to the price changes of water than of salt, because there, bottled water is more of a necessity than a luxury.

6. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?
If the PED coefficient is greater than zero and smaller than one, it is considered inelastic, and therefore the responsiveness of the consumers to price changes is not very high. If the PED coefficient is equal to one, it is considered unit elastic, and thus the responsiveness of consumers changes to price changes according to the percentage change in price. An example of this would be if the percentage of a price of a good increases by one unit, the quantity demanded will decrease by one unit. If the PED coefficient is over one, it is considered elastic – the responsiveness of consumers to price changes is greater, and more elastic.

2. The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?
PED would equal zero if the consumers are not at all affected by changes in price; the good will still be demanded. This could possibly happen if related to a good that is necessary, one which people would be willing to pay any amount of money for. Medication can in some cases be an example of this (such as insulin, which diabetics would be willing to pay however much for). When the PED equals zero, it is called perfect demand.

3. For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?
This would really depend on which country one is situated in – if you are in a country where good tap water is readily available, there is less need for bottled mineral water, whereas table salt is a good that is used frequently in cooking, and also needed to maintain good health. However, if you were in a country with no easily accessible and drinkable water, bottled mineral water would have a lower price elasticity, because people would be willing/able to pay more for good, drinkable water than they would table salt.

7. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?

The relationship between the value of the PED coefficient and the responsiveness of consumers is a direct relationship. If the PED coefficient increases, then the responsiveness of consumers to changes in the price of a good would also increase.

2. The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?

If the PED coefficient was equal to zero, this would mean that the consumers of a particular product are not responsive at all to a change in price of a product. The increase in price has no effect of the quantity of the good demanded. On a graph, the demand curve would be a vertical line. One example of a good that could model such a curve would be insulin. People, who are highly dependent on the intake of insulin, will have to buy insulin no matter what the price is. Thus their quantity demanded is the same for whatever the price. Their responsiveness to change of price is 0 as they will always buy the product.

3. For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?

Firstly, the need for the product must be taken into consideration. How essential is the product for someone’s survival. The answer to these questions will vary from country to country. In general, table salt is a widely used product that is consumed in almost every meal. Consumers will be less responsive to changes in price as their need to buy salt is relatively greater than bottled mineral water. The demand curve for table salt would be steeper than the demand curve for bottled mineral water in this situation. Living in Switzerland, I would expect the PED coefficient to be closer to 0 than the PED for bottled water. However, in other places where the need for clean water is greater than the need for table salt, consumers would be more responsive to changes in table salt prices. In such a case, the demand curve for bottled mineral water would be steeper than that of table salt.

8. 1. What is the relationship between the value of the PED coefficient and the responsiveness of consumers to price changes?
The greater the value of the PED coefficient, the more responsive consumers are to price changes.

2. The video explains how to interpret the various possible results of the PED calculation. But it does not explain what is meant by a PED coefficient of ZERO. How could PED = 0, and how could we interpret such a result?
PED would equal zero if consumers were not at all responsive to changes in price; this would occur if demand was constant regardless of price. This might be the case for a good that is necessary: despite higher prices, people would still buy it if they needed it. An example could be water, or medication for someone with chronic illness (such as insulin for diabetics).

3.For which good would you expect consumers to be more responsive to price changes: table salt or bottled mineral water? Why?
The situation would be different depending on the location. In Switzerland, where clean water is available free from the tap, table salt would have a lower price elasticity. People consume salt regularly and it is necessary for cooking, so would not change their quantity demanded if the price increased. However, if bottled mineral water became more expensive, the quantity demanded would change much more quickly as people would switch to alternatives such as tap water.
In a country where water is not a readily available, the two might be reversed, if bottled water was the more necessary good.

9. wasn’t sure if this was the blog post you wanted us to comment on, but here it is anyway;

1) The relationship between the PED coefficient and the responsiveness to change of consumers is that; the higher the PED coefficient is, the more responsive consumers are to a change in price. Such that with a high PED coefficient, a small increase in price will have a much larger impact on demand for that product in the form of a large decrease in demand. Alternatively a small decrease in price will consequently show a large increase in demand. When the PED coefficient is low (below 1) then a change in price will show no severe drop in demand relative to how much the price changed by, consumers are therefore said to be less responsive to price change if the PED coefficient is low.

2) We interpret a PED of zero as something that is ‘perfectly inelastic’ because this result shows that no matter how much the price changes by, consumers will still purchase the product. These circumstances are rare in the real world, but are possible with products such as pharmaceuticals which are essential to health and human lives; it is also seen with products which have a strong addictive aspect, such as heroine.

3) I think that consumers would be more responsive to a change in price of bottled mineral water, because if the price was to change drastically relative to its original price then consumers would just get the water they drink straight from the tap (providing it is a clean supply). The tap water would act as a substitute which is far cheaper. The consumer responsiveness to a change in table salt is barely anything because the price of salt is already relatively low, even if the percentage increase was to be by 100% this would only account for a mere Franc.

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