Price elasticity of demand — common mistakes

In an exam question asking for advice on pricing strategy to increase revenue, your first step must be to identify or deduce the PED of the product. Your recommendation to raise or lower the price depends entirely on whether demand is price elastic or price inelastic. Always justify your answer by explaining the proportional changes in quantity demanded versus price.

Use midpoint formula if the question specifies arc elasticity. State whether demand is elastic or inelastic and explain the revenue implication.

No. This is a common misconception. While a steeper curve is generally more inelastic than a flatter one, elasticity is not constant along a straight-line demand curve, whereas the gradient is. Gradient measures absolute change (rise/run), while elasticity measures percentage change (%ΔQd / %ΔP). The percentage change calculation depends on the starting price and quantity, which is why PED varies at different points on the curve.

The negative sign is a natural consequence of the law of demand (price and quantity demanded are inversely related). By convention, economists use the absolute (positive) value to avoid confusion when comparing elasticities. It is more intuitive to say a PED of 2 is 'more elastic' than a PED of 0.5, rather than comparing -2 and -0.5, where -0.5 is mathematically the larger number.

Not usually in the real world. A single PED value given in a textbook or exam is an estimate for a specific price range at a particular point in time. In reality, the PED for a product changes at different price points (as shown by the straight-line demand curve model). Furthermore, it can change over time as new substitutes emerge, consumer incomes change, or tastes and preferences evolve. Therefore, PED is a dynamic, not a static, measure.