Study Notes
Price Elasticity of Demand (PED) measures how responsive the quantity demanded of a good is to a change in its price. It helps understand the strength of the inverse relationship between price and quantity demanded.
- Price Elasticity of Demand (PED) — the responsiveness of quantity demanded to a change in price.
Example: If the price of coffee increases by 20%, the demand decreases by 37.5%. - Inelastic Demand — when quantity demanded is not very responsive to a change in price.
Example: Petrol demand decreases slightly when prices rise. - Elastic Demand — when quantity demanded is very responsive to a change in price.
Example: Demand for TVs decreases significantly with a price increase. - Unitary Elastic Demand — when quantity demanded changes proportionately with price.
Example: Demand for iced tea changes equally with price changes. - Perfectly Inelastic Demand — when quantity demanded does not change with price.
Example: Insulin demand remains constant despite price changes. - Perfectly Elastic Demand — when quantity demanded changes infinitely with price changes.
Example: Demand for fish drops to zero if the price rises above a certain point.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Demand (PED)
- Inelastic Demand
- Elastic Demand
- Unitary Elastic Demand
- Perfectly Inelastic Demand
- Perfectly Elastic Demand
Common Confusions
- Confusing inelastic demand with elastic demand
- Misunderstanding the relationship between PED and total revenue
Typical Exam Questions
- What is PED?
PED is the responsiveness of quantity demanded to a change in price. - How does PED affect total revenue?
If demand is elastic, total revenue decreases with a price increase; if inelastic, total revenue increases. - Why is PED important for firms?
It helps firms decide on pricing strategies to maximize revenue.
What Examiners Usually Test
- Calculating PED using the formula
- Understanding the determinants of PED
- Explaining the implications of different PED values for businesses and governments