PED and Revenue

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Price elasticity of demand (PED) is one of the key concepts when it comes to evaluating the impact of a demand/supply shift. The price elasticity of demand tells us no just whether price or quantity increases or decreases but how much demand for a product changes when price changes. This has an impact on revenue.

PED is one of the first bits of maths you come across in A Level Economics but if you are not very good at maths, don't panic, it isn't too tricky. To calculate PED you first need to be able to calculate a percentage change. If your not sure how to do this then have a look here. Once you can do that it is easy. Simply divide percentage change in quantity demanded by percentage change in price. If the number is between 0 and -1 then it is price inelastic and if it is past -1 then it is elastic. The number will always be negative. 

If PED is very inelastic then when price increases a lot then demand will fall by only a very small amount. This means that the firm gets a lot more money from each customer and only loose a very small number, hence revenue (price x quantity) increases. The presentation below takes you through calculating revenue, the effect PED has on it and how to show this diagramatically

 
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