IB Economics SL (Micro)

Define PED, give the formula

the degree of responsivenessof the quantity demanded of a product when there is a change in its price.

PED = % change in quantity demanded/% change in price

Describe perfectly inelastic demand, it's graph and an example

PED value = 0

A 1% increase in price causes a 0% decrease in quantity demanded - people are willing and able to buy the same amount at any price

eg. A good where people need an exact amount no matter the price

Describe inelastic demand, it's graph, and an example

A 1% increase in price causes a less than proportional decrease in quantity demanded

PED between 0 and -1

Graph is a steep downwards slope

eg. Necessities, addictive substances

Describe unit elastic demand, it's graph, and sn example

PED = -1

A 1% increase in price causes a 1% decrease in quantity demanded. A change in price causes a proportional decrease in the quantity demanded

Graph is a downwards curve

eg. N/A

Describe elastic demand, it's graph, and an example

PED between -1 and negative infinity

A 1% increase in price causes a greater than proportional (greater than 1%) decrease in quantity demanded 

Graph is a shallow downwards slope

eg. Non-necessities with lots of substitutes - custard creams, orange juice

Describe perfectly elastic demand, its graph, and example

PED = negative infinity

Any increase in price causes demand to dsll all the way to zero.

eg. A product with a perfect substitute that consumers know about and can easily switch to

List and describe the determinants of PED

1. Necessity - a higher degree of necessity results in a more inelastic demand

2. Number and closeness of substitutes - the higher this is, the more elastic demand is

3. Time period considered - the longer the time period the product is being considered,the more time people have to find substitutes, making demand more elastic 

4. Proportion of income spent on the good - the higher this is,the more elastic demand is

Give the formula for revenue

Revenue = P x Q