IB Economics Topic 2.5.3 Importance of PED for Firms and Government Decision Making Revision Notes (SL/HL)

IB Economics Topic 2.5.3 Importance of PED for Firms and Government Decision Making Revision Notes (SL/HL) | RevisionDojo

Written by official IB examiners

Firms can use $PED$ to maximise revenue by changing prices:

If the demand is currently elastic, then decreasing prices would lead to a higher revenue.
If the demand is currently inelastic, then increasing prices would lead to a higher revenue.
If the demand is currently unit elastic, $PED=1$, then there can be no effect.

In essence, when focusing on a straight line curve, the price where $PED=1$ will lead to the highest revenue because:

If $PED < 1$, the prices can be increased, leading to the $PED$ to increase as well (HL section 2.5.2) until $PED = 1$ as otherwise your revenues will fall.
Similarly if $PED > 1$, then the prices can be decreased as $PED$ decreases (HL section 2.5.2) until eventually at $PED = 1$ as otherwise your revenues will fall.

Common Mistake

The firm's profit and total revenue should not be confused with each other!

$\text{Profit} = \text{Total Revenue} - \text{Total Costs}$
Meanwhile: $\text{Total Revenue} = \text{Price} \times \text{Quantity Demanded}$

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Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

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Firms can use $PED$ to maximise revenue by changing prices:

If the demand is currently elastic, then decreasing prices would lead to a higher revenue.
If the demand is currently inelastic, then increasing prices would lead to a higher revenue.
If the demand is currently unit elastic, $PED=1$, then there can be no effect.

In essence, when focusing on a straight line curve, the price where $PED=1$ will lead to the highest revenue because:

If $PED < 1$, the prices can be increased, leading to the $PED$ to increase as well (HL section 2.5.2) until $PED = 1$ as otherwise your revenues will fall.
Similarly if $PED > 1$, then the prices can be decreased as $PED$ decreases (HL section 2.5.2) until eventually at $PED = 1$ as otherwise your revenues will fall.

Common Mistake

The firm's profit and total revenue should not be confused with each other!

$\text{Profit} = \text{Total Revenue} - \text{Total Costs}$
Meanwhile: $\text{Total Revenue} = \text{Price} \times \text{Quantity Demanded}$

Definition

Paywall

(on a website) an arrangement whereby access is restricted to users who have paid to subscribe to the site.

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Note

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam quis nostrud exercitation.

Excepteur sint occaecat cupidatat non proident

Tip

Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.
Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris.
Duis aute irure dolor in reprehenderit in voluptate velit esse cillum.

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.5.3 Importance of PED for Firms and Government Decision Making Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account

anim nostrud sit dolore minim proident quis fugiat velit et eiusmod nulla quis nulla mollit dolor sunt culpa aliqua

Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

Unlock the rest of this chapter with a free account