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Price elasticity of demand (PED)

A measurement of the extent to which demand for a particular product (or service) changes in response to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Example: A business reduces the price of a product from £20 to £16. As a result demand increases from 12,000 to 18,000 units. In percentage terms the price has decreased by: £4 / £20 X 100 = 20%. In percentage terms demand has increased by: 6,000 / 12,000 X 100 = 50%. PED is therefore: 50% / 20% = 2.5. This resultant figure is known as the * price elasticity coefficient. This means that for every 1% change in price, demand is likely to change by 2.5%.

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