Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
   1. Price elasticity of demand (PED)
   2. PED values
   3. Determinants of price elasticity
   4. Calculating PED
   5. Elasticity along a straight line demand curve
   6. Elasticity and revenue
   7. PED - primary vs manufactured
   8. PED and taxation
   9. Cross elasticity of demand
   10. XED and business decisions
   11. Income elasticity of demand
   12. YED and business decisions
   13. Price elasticity of supply
   14. Possible PES values
   15. PES - calculation
   16. Determinants of PES
   17. PES - primary vs manufactured
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

Calculating PED

Syllabus: Calculate PED between two designated points on a demand curve using the PED equation.

You will be expected to calculate and use elasticity, and to interpret given data. This may happen in any of the papers that are taken. As we have seen price elasticity of demand is calculated and defined as:

Where Qd = Quantity demanded
and P = Price

So, to calculate the value of the price elasticity, we simply need to substitute the appropriate values in this equation.

Let´s Do Some Economics

Example 1 - price elasticity of demand

A product sells for $100 per unit, and the demand at that price is 10,000 units per week. The firm increases its price to $110 each and sales fall to 8,000 units per week. What is the price elasticity of demand for the product, and what effect will the price rise have on the firm's revenue? (Revenue is just price times quantity)

Price elasticity of demand = % change in quantity demand / % change in price = -20 / +10 = -2

Demand in this case is elastic, i.e. the numerical value is greater than 1.

Sales revenue was $100 x 10,000 = $1,000,000 and became $110 x 8,000 = $880,000

Revenue has fallen because demand is elastic: Elastic is when the proportionate change in demand is greater than the proportionate change in price

Remember, if demand for a good or service is price elastic then an increase in price will decrease both sales and sales revenue. However, a price cut will increase both sales and revenue.

Example 2 - price elasticity of demand

A product has a PED (price elasticity of demand) of 0.8. At present it sells for $10 and sales have reached 100,000 per month. The firm is planning a price increase to $12 each. What can it expect to happen to sales and revenue if it goes ahead with the rise?

First remember that price elasticity is negative, and then use the formula that you know.

PED = 0.8

Cross-multiply and find:

% change in quantity = -0.8 x 20 = - 16%

New sales = 84% (100,000) = 84,000

Price would go up and sales would fall, as expected.

Revenue was $10 x 100,000 = $1,000,000

Would become $12 x 84,000 = 1,008,000

Revenue, on the other hand, would increase by $8,000.

Thinking time: In example 1 the price increase and revenue fell but in example 2 the price increase and revenue increased - can you say why?

Measuring elasticity