Preview
PED Along a Linear Demand Curve & Primary Commodities vs Manufactured Goods
IB DP Economics — Unit 2: Microeconomics | HL | 2.5 Elasticities of Demand
📋 What You Will Learn
- Explain why PED varies continuously along a linear (straight-line) demand curve, from elastic at the top to inelastic at the bottom
- Identify the midpoint of a linear demand curve as the unit-elastic point and explain its significance for total revenue
- Analyse the relationship between PED and total revenue as a firm moves along a linear demand curve
- Distinguish between the typical PED characteristics of primary commodities and manufactured goods, and explain the reasons for these differences
- Apply the primary commodity vs manufactured goods distinction to real-world trade, pricing, and development contexts
- Evaluate the implications of low PED for primary commodity exporters and the terms of trade
🔍 Guiding Question Why do countries that export primary commodities often struggle to increase their export revenue even when they sell more, while manufacturers of branded goods can raise prices without losing many customers — and what does elasticity tell us about this asymmetry?
🌍 Why This Matters In 2023, global coffee output hit a record high — yet coffee-exporting nations like Ethiopia and Honduras saw export revenues stagnate or fall, because the price drop caused by excess supply outweighed the volume gain. Meanwhile, Apple raised iPhone prices by 10% in several markets and saw only a modest fall in sales. The difference is not luck — it is elasticity. Understanding how PED changes along a demand curve, and why primary commodities behave so differently from manufactured goods, is essential for understanding trade, development, and pricing strategy.
Part 1 — PED Along a Linear Demand Curve
A common misconception is that a straight-line demand curve has constant elasticity. It does not. The slope of a linear demand curve is constant, but PED changes at every point along it. This is a critical HL distinction that examiners test directly.
📖 Definition — Price Elasticity of Demand (PED) PED measures the responsiveness of quantity demanded to a change in the price of a good, ceteris paribus.
PED Formula
\[ \text{PED} = \frac{\%\Delta Q_d}{\%\Delta P} = \frac{\Delta Q_d / Q_d}{\Delta P / P} \] This can be rewritten as: \( \text{PED} = \frac{\Delta Q_d}{\Delta P} \times \frac{P}{Q_d} \)
On a linear demand curve, \( \frac{\Delta Q_d}{\Delta P} \) (the inverse of the slope) is constant . But \( \frac{P}{Q_d} \) changes at every point — it is high at the top of the curve (high P, low Q) and low at the bottom (low P, high Q). This is why PED varies along a linear demand curve.
Why PED Changes Along a Linear Demand Curve
- At the top of the demand curve : price is high, quantity is low → \( \frac{P}{Q} \) is large → PED is large in absolute value → demand is elastic
- At the midpoint of the demand curve: \( \frac{P}{Q} \) produces PED = −1 → demand is unit elastic
- At the bottom of the demand curve : price is low, quantity is high → \( \frac{P}{Q} \) is small → PED is small in absolute value → demand is inelastic
- At the price intercept (where Q = 0): PED approaches negative infinity (perfectly elastic)
- At the quantity intercept (where P = 0): PED = 0 (perfectly inelastic)
🔗 Intuitive Hook — The Percentage Problem Imagine a $1 price rise on a good currently priced at $100 — that is only a 1% increase. The same $1 rise on a good priced at $2 is a 50% increase. Even if the same number of units are lost in both cases, the percentage change in price is vastly different. This is why the same absolute price change produces very different PED values depending on where you are on the demand curve.