Page 100 - Microsoft Word - 00 ACCA F1 Notes Prelims.docx

Chapter 7

Elasticity of demand

3.1 Price elasticity of demand (PED)

PED explains the responsiveness of demand to changes in price.

% change in demand
PED =
% change in price

 Usually negative – assume this in questions unless otherwise indicated

 Different methods of calculation:

– Arc method – non-average and average methods

– Point method

 >1 is 'elastic'. A price drop should increase revenue.

 <1 is 'inelastic'. A price increase should increase revenue.

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