📊

Price Elasticity of Demand

PED formula, elastic vs inelastic demand, revenue implications.

🎓 IGCSE (Year 10–11) 💰 Microeconomics ⭐ ★★★★

Price Elasticity of Demand (PED): How Much Do Buyers Care About Price?

If a supermarket raises bread prices by 50%, sales barely change — people need bread. If a luxury spa raises prices by 50%, most customers look for alternatives. The difference is price elasticity: how strongly quantity demanded responds to a price change.

PED = % Change in Quantity Demanded ÷ % Change in Price

Always negative (inverse relationship). Expressed as absolute value:
|PED| > 1 → Elastic (quantity is responsive)
|PED| < 1 → Inelastic (quantity is unresponsive)
|PED| = 1 → Unit elastic (proportional response)

💊 Medicine vs Handbag: Insulin-dependent diabetics need their medicine whatever the price — PED ≈ 0 (perfectly inelastic). A luxury handbag at £2,000 has many alternatives and is non-essential — PED might be −3 (elastic). Price doubles → sales collapse. Understanding elasticity tells firms how much power they really have to raise prices.

🔄 Substitutes

More available substitutes → more elastic. Consumers easily switch. Fewer substitutes → more inelastic. No alternative → very inelastic.

🧾 % of Income

Goods taking a large share of income are more elastic — consumers think twice. Small share (salt, matches) → very inelastic.

⏰ Time

Demand becomes more elastic over time as consumers find alternatives, change habits, or switch technologies.

✅ Necessity

The more essential a good, the more inelastic. The more discretionary (luxury), the more elastic.

PED Value	Type	Price Rise → Revenue?
\|PED\| > 1	Elastic	Revenue FALLS (volume drop > price gain)
\|PED\| < 1	Inelastic	Revenue RISES (volume drop < price gain)
\|PED\| = 1	Unit elastic	Revenue unchanged

← Back to IGCSE (Year 10–11) 📊 Economics Tools →

📊 Interactive Economic Diagram

Elasticity

💡 How to read economic diagrams: Always label axes (Price on Y-axis, Quantity on X-axis for most diagrams). Shifts represent changes in non-price factors; movements along a curve represent price changes. Equilibrium is where curves intersect.

📊 PED Calculator

Original Quantity New Quantity Original Price (£) New Price (£)

Enter values above and click Calculate.

💡 Exam Tip: Show all working in economics calculations. Use the correct formula, substitute values clearly, state units, and interpret your result in economic terms.