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PRICE ELASTICITY OF DEMAND

Mind Map of Price Elasticity of Demand

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Definition

Responsiveness of to a Change in , Ceteris Paribus.

Formula

Percentage change in Percentage change in

Magnitude

PED = 1 Unitary Price ElasticityChange in quantity demanded is

change in price of the good.

PED > 1 Demand is Price ElasticChange in quantity demanded is

than change in price of the good.

PED < 1 Demand is Price InelasticChange in quantity demanded is

than change in price of the good.

Determinants

Application (Use for Firms)

Increase price if PED is (PED < 1), & vice versa.Can pass on higher tax burden to consumers as higher price if PED is (PED < 1).

Application (Use for Govt)

Tax good that is price in demand (PED < 1) to collect more tax revenue.Tax good that is price in demand (PED > 1) to discourage consumption.

PED < 1 (Inelastic)

PED = 1 (Unitary Elasticity)

PED > 1 (Elastic)

Quantity

Price

Not required in syllabus

Quantity

Price

Unit Elastic Demand Throughout

Quantity

Price

Perfectly Inelastic Demand Throughout

Quantity

Price

Perfectly Elastic Demand Throughout

D

D

D

Not Required in Syllabus

Coefficient/Signs

Due to PED is always

.We take the absolute number only.

Total Revenue

Price

Quantity

Quantity

PED 1 (Elastic)

PED 1 (Unitary Elasticity)

PED 1 (Inelastic)

TR

D

Application (Effect on Total Revenue or Total Expenditure)

Note: Total Revenue for Producer is

equivalent to Total for

Consumers.