2281 · 2.7
Practice and worked examples for 2281 Price elasticity of demand. Short previews only — attempt the full question in MarkScheme against the official scheme.
Price rises from £4 to £5; quantity falls from 200 to 160. Find PED.
ΔP = +25%, ΔQ = −20%
PED = (−20%)/(+25%) = −0.8 (inelastic)
TR before = £800; after = £800 — unchanged direction confirms inelastic range near unit.
A cinema reduces its ticket price from $15 to $12. Consequently, the number of tickets sold per screening rises from 80 to 120. Calculate the PED and advise the cinema on its pricing decision.
Step 1: Calculate the percentage change in price. %ΔP = [(New Price - Old Price) / Old Price] × 100 %ΔP = [($12 - $15) /
Step 2: Calculate the percentage change in quantity demanded. %ΔQd = [(New Qd - Old Qd) / Old Qd] × 100 %ΔQd = [(120 - 80) / 80] × 100 = +50%
Step 3: Calculate PED. PED = %ΔQd / %ΔP = 50% / -20% = -2.5
Step 4: Interpret the result and advise. The absolute value of PED is 2.5, which is greater than 1, so demand is price elastic. The price reduction was a good decision. Total revenue before was $15 × 80 = $1200. Total revenue after is $12 × 120 = $1440. The price cut led to a $240 increase in revenue because the percentage increase in quantity demanded was much larger than the percentage decrease in price.