Why do we need diagrams?
Diagrams and graphs basically make economics easier to understand and without them, economists would probably crawl into corners and cry. We're going to use graphs to help us understand PED better. (tutor2u.net have some pretty good diagrams that I've used here)Relatively elastic changes
If you can't quite remember what elasticity is, just check the post about Demand again. Economists just use diagrams to better illustrate and prove their ideas.
Explanation
This graph shows what a relatively elastic PED would look like (if it were PES it would simply have a positive gradient and therefore go from the bottom left to top right). This diagram shows how a change in price (P2 to P3 for example) leads to a change in quantity that is much larger (Q2 to Q3).
Application
If you had a company selling chocolate bars who suddenly dropped the price of them from 50p to 10p, people would buy much more. Imagine that the price change is the move from P1 to P2 and the quantity Q1 to Q2. The rectangle's area created by the dotted lines -for P1 and Q1 for example- signifies the Total Revenue. (Total Revenue is the total amount of money that a company earns before other costs are taken away.) Now, look at the diagram and try to figure out what happens to the total revenue (TR) when the price changes: going both up and down.
Answer
For relatively elastic goods: a rise in price decreases TR; and a fall in price increases TR.
