Equation of PEDEditPED = (%Change Q)/(%Change P)
- If the PED is less than 1 for a good, it is considered as inelastic.
- If the PED is equal to 1 for a good, it is considered as unit elastic.
- If PED is more than 1 for a good, it is considered as elastic.
Price Elasticity of Demand is a measure of the responsiveness of quantity demanded to changes the price. Governments consider PED when choosing to tax goods. Goods which are most inelastic are the best goods to tax, as they will bring the greatest tax revenue. An inelastic PED is not typically a good thing for developing countries because of its instability. The relationship between quantity demanded and price should not have wild variations. A postive sign means it is a substitution with another good. A negative sign means it a complement to another good. Between 0 to 1 there is a weak relationship. Over 1, there is a strong relationship.
When a good is relatively inelastic, it means that the price can change drastically and have little effect on the quantity demanded. Items that are inelastic typically do not have many (or any) substitutes. When a good is relatively elastic, the opposite is true. Wide price varitaions have bigger changes in quantity demanded. These goods tend to be much more stable, and also happen to mostly be secondary and tertiary goods and services.