Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How is price elasticity of demand (PED) calculated?

1. PED = Change in price ÷ Change in quantity demanded

2. PED = Change in quantity demanded ÷ Change in price

3. PED = % change in quantity demanded ÷ % change in price

4. PED = % change in price ÷ % change in quantity demanded

The correct answer is: PED = % change in quantity demanded ÷ % change in price

The calculation of price elasticity of demand (PED) involves determining how sensitive the quantity demanded of a good is to a change in its price. The correct formulation is based on percentages rather than absolute changes, which allows for a consistent measure across different price levels and quantities. The formula for PED is expressed as the percentage change in quantity demanded divided by the percentage change in price. This approach provides a more standardized way to assess elasticity because it accounts for the relative changes in both quantity and price, making it easier to compare the elasticity of different goods or across different scenarios. Using percentage changes helps eliminate the issue with units and scales, ensuring that the elasticity measure is dimensionless and can be universally understood. For example, if the price of a product increases by 10% and the quantity demanded decreases by 20%, using the percentage changes in the formula directly shows a clear picture of the demand response, indicating that demand is elastic. In contrast, the other choices present formulas that either reverse the relationship between quantity and price or rely on absolute changes, which do not provide the same level of insight into consumer behavior in response to price changes.