Drawing and interpretation of demand curve diagrams to show different PED

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Allocation of Resources: Price Elasticity of Demand (PED)

Allocation of Resources – Price Elasticity of Demand (PED)

Learning Objective

Students will be able to draw and interpret demand‑curve diagrams that illustrate different values of price elasticity of demand.

1. What is Price Elasticity of Demand?

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.

\$\$

\text{PED} = \frac{\%\Delta Q_{d}}{\%\Delta P}

\$\$

Where:

  • \(\%\Delta Q_{d}\) = percentage change in quantity demanded

  • \(\%\Delta P\) = percentage change in price

2. Interpreting the PED \cdot alue

The sign of PED is always negative because price and quantity demanded move in opposite directions (the law of demand). In practice we usually refer to the absolute value.

Absolute PEDElasticity TypeInterpretationTypical Shape of Demand Curve
> 1ElasticQuantity demanded changes proportionally more than price.Flatter (relatively horizontal) demand curve.
= 1Unitary elasticQuantity change equals price change proportionally.Intermediate slope.
0 < 1InelasticQuantity demanded changes proportionally less than price.Steeper (relatively vertical) demand curve.
0Perfectly inelasticQuantity demanded does not change as price changes.Vertical demand curve.
∞ (or undefined)Perfectly elasticAny price increase causes quantity demanded to fall to zero.Horizontal demand curve.

3. Steps to Draw Demand Curves for Different PED

  1. Draw a set of axes: price (P) on the vertical axis, quantity demanded (Q) on the horizontal axis.

  2. Mark a starting point (P₁, Q₁) on the curve.

  3. Choose a small price change, e.g., a 10 % decrease from P₁ to P₂.

  4. Calculate the corresponding quantity change using the desired PED value:

    \$ Q{2}=Q{1}\left[1+\text{PED}\times\frac{\Delta P}{P_{1}}\right] \$

  5. Plot the new point (P₂, Q₂). Connect the points with a smooth line.

  6. Repeat for additional price changes to obtain a clear curve.

4. Diagrammatic Illustrations

4.1 Perfectly Elastic Demand

Suggested diagram: Horizontal line at a fixed price, labelled “Perfectly elastic (|PED| = ∞)”.

4.2 Highly Elastic Demand

Suggested diagram: Flatter downward‑sloping line, labelled “Elastic (|PED| > 1)”.

4.3 Unitary Elastic Demand

Suggested diagram: Moderately sloped line, labelled “Unitary elastic (|PED| = 1)”.

4.4 Inelastic Demand

Suggested diagram: Steeper downward‑sloping line, labelled “Inelastic (0 < |PED| < 1)”.

4.5 Perfectly Inelastic Demand

Suggested diagram: Vertical line, labelled “Perfectly inelastic (|PED| = 0)”.

5. Using PED in Decision‑Making

  • Pricing strategy: Firms with elastic demand must be careful about raising prices, as revenue may fall.

  • Tax incidence: Taxes on goods with inelastic demand cause larger price increases for consumers.

  • Revenue prediction: If demand is elastic, a price cut will increase total revenue; if inelastic, a price rise will increase total revenue.

6. Quick Revision Checklist

  • Know the formula for PED and how to calculate percentage changes.

  • Remember the five categories of elasticity and their characteristic curve shapes.

  • Be able to sketch each type of demand curve from a given PED value.

  • Understand how PED influences pricing, tax policy, and revenue outcomes.