A PED of −0.3 means that demand is

inelastic. Ignoring the sign, 0.3 is less than 1.

The price of a good rises by 20% and the quantity demanded falls by 30%. What is the PED?

−1.5. −30 ÷ 20 = −1.5. Quantity goes on top.

Which product is likely to have the most price elastic demand?

one brand of chocolate bar. It has many close substitutes: the other brands.

Demand for a firm's product is price inelastic. What happens to its revenue if it raises the price?

Revenue rises. Sales fall by a smaller percentage than the price rises.

The PED for a good is −2. The firm cuts its price by 5%. What happens to the quantity demanded?

It rises by 10%. Percentage change in quantity = PED × percentage change in price = −2 × −5 = +10%.

Price elasticity of demand · Edexcel IGCSE Economics

In plain words

When a price goes up, people buy less. But how much less? For some things, like salt, hardly any less. For others, like one brand of crisps, far less. Price elasticity of demand (PED) measures how strongly demand responds to a change in price.

It matters to a firm because it decides what a price change does to revenue.

5 things to know

PED = percentage change in quantity demanded ÷ percentage change in price.
Ignoring the minus sign: more than 1 is elastic (demand responds strongly), less than 1 is inelastic, exactly 1 is unitary.
0 is perfectly inelastic (the quantity does not change at all). Infinity is perfectly elastic.
Demand is more elastic when there are close substitutes, when the product is a luxury, when it takes a large share of income, and over a longer time.
If demand is inelastic, a price rise increases revenue. If demand is elastic, a price cut increases revenue.

Worked example

The price of a magazine rises from $4 to $5 and sales fall from 200 to 180. Calculate the PED and say what it means.

Percentage change in price = 1 ÷ 4 × 100 = 25%.
Percentage change in quantity = −20 ÷ 200 × 100 = −10%.
PED = −10 ÷ 25 = −0.4. It is less than 1, so demand is inelastic.

Tips and tricks

Quantity goes on top. Dividing the wrong way round is the most common error. Remember: Q comes before P in the formula.
A percentage change is always the change divided by the original value, times 100.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

Price elasticity of demand: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

A PED of −0.3 means that demand is
- elastic
- inelastic (the answer)
- unitary
- perfectly elastic
Ignoring the sign, 0.3 is less than 1.
The price of a good rises by 20% and the quantity demanded falls by 30%. What is the PED?
- −0.67
- −0.5
- −1.5 (the answer)
- −6
−30 ÷ 20 = −1.5. Quantity goes on top.
Which product is likely to have the most price elastic demand?
- water
- electricity
- salt
- one brand of chocolate bar (the answer)
It has many close substitutes: the other brands.
Demand for a firm's product is price inelastic. What happens to its revenue if it raises the price?
- Revenue rises. (the answer)
- Revenue falls.
- Revenue stays the same.
- Revenue falls to zero.
Sales fall by a smaller percentage than the price rises.
The PED for a good is −2. The firm cuts its price by 5%. What happens to the quantity demanded?Stretch
- It rises by 2.5%.
- It rises by 7%.
- It rises by 10%. (the answer)
- It falls by 10%.
Percentage change in quantity = PED × percentage change in price = −2 × −5 = +10%.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

4 questions, 11 marks. Write your answers on paper, then check them.

Price elasticity of demand

Edexcel International GCSE Economics 4EC1 · 11 marks · papermunch.org

Name ______________________________ Date ______________

State the formula for price elasticity of demand.[2]
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Percentage change in quantity demanded divided by percentage change in price.
I got this one
A 10% fall in the price of a product causes the quantity demanded to rise by 25%. Calculate the PED and state whether demand is elastic or inelastic.[3]
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PED = 25 ÷ −10 = −2.5. It is greater than 1, so demand is elastic.
I got this one
Explain why the demand for petrol is price inelastic.[3]
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Petrol has no close substitute for most drivers and is a necessity for getting to work, so when the price rises people cut the amount they buy by a smaller percentage.
I got this one
A firm sells 500 units at $8. It raises the price to $10 and sales fall to 450. Calculate the change in revenue and say what it shows about PED.[3]
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Revenue rises from $4000 to $4500, an increase of $500. Revenue rose when the price rose, so demand is price inelastic.
I got this one

Answers: Price elasticity of demand

1. Percentage change in quantity demanded divided by percentage change in price.
2. PED = 25 ÷ −10 = −2.5. It is greater than 1, so demand is elastic.
3. Petrol has no close substitute for most drivers and is a necessity for getting to work, so when the price rises people cut the amount they buy by a smaller percentage.
4. Revenue rises from $4000 to $4500, an increase of $500. Revenue rose when the price rose, so demand is price inelastic.