PED

Summary and Exam Tips for PED

Price Elasticity of Demand (PED) is a subtopic of Microeconomics, which falls under the subject Economics in the IB DP curriculum. PED measures how responsive the quantity demanded of a good is to a change in its price. It is always negative due to the inverse relationship between price and demand, but we focus on the absolute value to determine elasticity. The degrees of PED include perfectly inelastic ($|PED| = 0$), inelastic ($|PED| < 1$), unitary elastic ($|PED| = 1$), elastic ($|PED| > 1$), and perfectly elastic ($|PED| = \infty$).

Key determinants of PED are the number and closeness of substitutes, degree of necessity, proportion of income spent, and time. PED affects total revenue (TR) and is crucial for firms and governments in decision-making. For instance, firms may adjust pricing strategies based on PED to maximize profits, while governments consider PED when imposing taxes or subsidies.

Understanding how PED varies along a linear demand curve is essential, especially for higher-level students. Primary commodities generally have lower PED compared to manufactured products due to fewer substitutes and higher necessity.

Exam Tips

• Understand Definitions: Clearly define PED and its degrees. Use examples like coffee or petrol to illustrate concepts.
• Calculation Practice: Be comfortable with calculating PED using the formula $\text{PED} = \frac{\%\text{ change in QD}}{\%\text{ change in price}}$.
• Graph Analysis: Practice interpreting graphs, especially how PED changes along a linear demand curve.
• Real-World Applications: Relate PED to real-world scenarios, such as pricing strategies for firms or tax policies for governments.
• Key Determinants: Focus on the determinants of PED and how they influence elasticity, using examples to solidify understanding.