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

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1.2 ElasticitySub-topicSL/HL Core – Assessment ObjectivesPrice Elasticity of Demand (PED)Priceelasticity ofdemand anditsdeterminantsPrice elasticity of demand involvesresponsivenessof quantity demanded to a change in price, alonga 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, priceinelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand.transtutors.comPrice elastic demand can be seen in the top middle diagram above where the slope is quite gentleand PED is greater 1 but less than infinity. This means that a change in the price of a product leadsto a greater than proportionate change in quantity demanded of it. For instance, if the price of anelastic product is raised, the quantity demanded will decrease so much so that the total revenuegenerated 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 andPED is greater than 0 but less than 1. This means that a change in the price of a product leads to aproportionally smaller change in the quantity demanded of it. For instance, if the price of aninelastic product is raised, the change in the quantity demanded will be comparatively so small thatthe 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 thegraph is a curve so that PED is 1. This means that a change in the price of a product leads to aperfectly proportional change in the quantity demanded of it. For instance, if the price of a unitelastic product is raised, the quantity demanded will fall by the same percentage so that the producergenerates 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 andPED 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 toanother 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 andPED 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

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Term
Fall
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Tony Yang
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