Interpreting PED & YED

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Interpreting Price Elasticity of Demand Data

Understanding the price elasticity of demand is helpful for businesses. This is because they can understand how a price change will impact their sales.

Price elasticity of demand

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.
Businesses can use price elasticity of demand to understand how the quantity demanded by customers will change in response to price.

Formula for PED

PED = (% change in quantity demanded)÷ (% change in price)

$PED coefficients$

PED coefficients

The price elasticity of demand coefficient (number) is usually negative as an increase in price will result in a decrease in quantity demanded and a decrease in price will result in an increase in quantity demanded.
The larger the price elasticity of demand coefficient (number) the greater the responsiveness of quantity demanded to a change in price.

Interpreting PED

If the price elasticity of demand is less than 1 (whether positive or negative) then this is described as price inelastic. This means that a change in price will lead to a change in quantity demanded which is less than the change in price.
If the price elasticity of demand is greater than 1 (whether positive or negative) then this is described as price elastic. This means that a change in price will lead to a change in quantity demanded which is greater than the change in price.

Changing PED

For example, the price elasticity demand for petrol is relatively inelastic as a change in price may not affect the quantity demanded of fuel as customers still need to purchase this product as it may be a necessity.

Using elasticity of demand as data

Marketing managers can use price elasticity of demand and income elasticity of demand to forecast and predict the impact of changes in price and income on the quantity of the business’ goods demanded by consumers.
- Using elasticity of demand allows marketing managers to act, such as advertising, to target customers if they think quantity demanded is likely to decrease.

Interpreting Income Elasticity of Demand Data

Understanding the income elasticity of demand is helpful for businesses. This is because they can understand how an income change will impact their sales.

Income elasticity of demand

Income elasticity of demand (YED) measures the responsiveness of quantity demanded to a change in consumer income.
Businesses can use income elasticity of demand to understand how the quantity demanded by customers will change in response to income.

Formula for YED

YED = (% change in quantity demanded) ÷ (% change in income)

YED coefficients

The larger the income elasticity of demand coefficient (number) the greater the responsiveness of quantity demanded to a change in income.
If the coefficient is positive, an increase in income will increase demand and a fall in income will decrease demand.
If the coefficient is negative, an increase in income will decrease demand and a fall in income will increase demand.

Interpreting YED

If the income elasticity of demand is less than 1 then this is described as inelastic. This means that a change in income will lead to a change in quantity demanded which is less than the change in income.
If the income elasticity of demand is greater than 1 then this is described as elastic. This means that a change in income will lead to a change in quantity demanded which is greater than the change in income.

Change in YED

For example, the income elasticity demand for premium cars is relatively elastic as consumers may decide they cannot purchase a new vehicle if their income reduced, so quantity demanded is likely to change by more than the change in income.