Price Elasticity of Demand (PED) is an important concept in economics that measures how sensitive the quantity demanded of a good or service is to changes in its price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

The formula for calculating PED is expressed as follows:

To interpret PED, it is crucial to remember that the value will always be negative due to the law of demand: as the price increases, the quantity demanded typically decreases, and vice versa. However, in practice, we often focus on the absolute value of PED, ignoring the negative sign for simplicity.

• If the absolute value of PED is greater than $1$, the demand is considered elastic. This indicates that consumers are highly responsive to price changes. For example, if the price increases, consumers will significantly reduce their quantity demanded, and conversely, if the price decreases, they will substantially increase their purchases.

• If the absolute value of PED is less than $1$, the demand is classified as inelastic. In this case, consumers are relatively unresponsive to price changes. An increase in price will not lead to a significant drop in quantity demanded, nor will a decrease in price result in a substantial increase in purchases.

• If the absolute value of PED equals $1$, the demand is said to be unit elastic. This means that the percentage change in quantity demanded is exactly equal to the percentage change in price.

Understanding PED is beneficial for both businesses and policymakers when making decisions about pricing strategies and taxation. For instance, if a business identifies that the demand for its product is elastic, it may choose to lower prices to boost sales. Conversely, if a government recognizes that the demand for a particular harmful product is inelastic, it might opt to increase taxes on that product, aiming to reduce consumption without significantly impacting tax revenue.