Explain price elasticity of demand, its measurement, determinants and practical importance to business.
How to lay out the answer. Follow the frame, then write it in your own words.
1 · Define and give the formula. PED = %ΔQd ÷ %ΔP; negative sign; read the absolute value.
2 · Degrees of elasticity with diagrams. [Diagram: five demand curves: vertical, steep, unit, flat, horizontal]
3 · Measurement.
Percentage method
Midpoint (arc) method for large changes
Point method on a demand equation
4 · Work one calculation. Rs. 400 → Rs. 440, 1,000 → 850 packets: PED = −1.5; TR falls from Rs. 400,000 to Rs. 374,000.
5 · Total revenue test. Elastic: price and revenue move opposite; inelastic: together; unit: unchanged.
6 · Determinants. Substitutes, necessity or luxury, share of income, time, habit, market definition.
7 · Practical importance with Sri Lankan examples. Pricing, excise taxes on cigarettes and fuel, price discrimination, export earnings, vegetable gluts at Dambulla.
8 · Conclude. Knowing elasticity lets a manager predict how a price change will affect sales and revenue.
Scoring tip: Always state whether the answer is elastic or inelastic after calculating. A bare number loses the interpretation mark.
