General Certificate of Secondary Education (GCSE) Economics Practice Exam

The formula for price elasticity of demand (PED) is correctly represented as PED = % change in quantity demanded / % change in price. This illustrates how sensitive the quantity demanded of a good is to a change in its price. When the price of a good changes, the resulting percentage change in quantity demanded shows how much consumers are willing to adjust their purchases in response to that price change.

This approach is crucial in economics as it helps businesses and policymakers understand consumer behavior. A high PED indicates that consumers react significantly to price changes, which is important for setting pricing strategies, while a low PED means that quantity demanded is less responsive to price fluctuations. Understanding this relationship guides decision-making in areas such as sales forecasting, inventory management, and taxation policy.