Theory question 105
ElasticitySection B (answer four questions only from this section)
(a) What is price elasticity of demand?
(b) With carefully labelled diagrams, illustrate each of the following: (i) perfectly inelastic demand (ii) unitary elastic demand (iii) fairly elastic demand (iv) perfectly elastic demand
Show the model answer
(a) Price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its own price: PED = % change in quantity demanded ÷ % change in price.
(b) Each diagram with price on the vertical axis and quantity on the horizontal axis:
(i) Perfectly inelastic (PED = 0): vertical demand curve; quantity is the same at all prices.
(ii) Unitary elastic (PED = 1): rectangular hyperbola; a price change causes an equal proportional change in quantity, so total spending is constant.
(iii) Fairly elastic (PED > 1): a gently sloping (flat) demand curve; a small price change causes a larger proportional change in quantity.
(iv) Perfectly elastic (PED = ∞): horizontal demand curve; buyers take any amount at one price and nothing above it.
Label axes, curves and the price/quantity changes on each diagram.