elasticities-study-guide 1 - 1.2 Elasticity Sub-topic...

1.2 Elasticity
Sub-topic SL/HL Core – Assessment Objectives
Price Elasticity of Demand (PED)
Price
elasticity of
demand and
its
determinants
Price elasticity of demand involves responsiveness of quantity demanded to a change in price, along
a given demand curve.
AO4 – Calculate PED using the following equation.
PED = percentage change in quantity demanded /percentage change in price
(Example $5 to $4.50, and 200,000 to 300,000. Remember, (b-a)/a *100 = % change.
& PED value is treated as if it were positive although its value is usually negative.)
(Same as PED of 5, since negative values for PED are treated as positives)
AO2 –Explain, using diagrams and PED values, the concepts of price elastic demand, price
inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.
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Price elastic demand can be seen in the top middle diagram above where the slope is quite gentle
and PED is greater 1 but less than infinity. This means that a change in the price of a product leads
to a greater than proportionate change in quantity demanded of it. For instance, if the price of an
elastic product is raised, the quantity demanded will decrease so much so that the total revenue
generated by the producers would also decrease, despite making more money per product.
Price inelastic demand can be seen in the bottom left diagram above where the slope is steep and
PED is greater than 0 but less than 1. This means that a change in the price of a product leads to a
proportionally smaller change in the quantity demanded of it. For instance, if the price of an
inelastic product is raised, the change in the quantity demanded will be comparatively so small that
the total revenue generated by the producers would increase.
Unit elastic demand can be seen in the bottom right diagram above (it should be a curve) where the
graph is a curve so that PED is 1. This means that a change in the price of a product leads to a
perfectly proportional change in the quantity demanded of it. For instance, if the price of a unit
elastic product is raised, the quantity demanded will fall by the same percentage so that the producer
generates the same amount of total revenue as before the price change.
Perfectly elastic demand can be seen in the top left diagram above where the line is horizontal and
PED is infinity. This means than even the slightest price change would cause demand to drop to 0. Of

course this is a very theoretical situation and while PED for certain products may approach infinity
(e.g. a very specific, not widely known brand of chocolate because consumers would switch to
another brand if the price increased), no product is perfectly elastic.
Perfectly inelastic demand can be seen in the top right diagram above where the line is vertical and
PED is 0. This means that any price change would not affect the quantity demanded in the slightest.
Of course this is a very theoretical situation and while PED for certain products may approach 0