Total revenue is price × quantity. When a firm raises its price, it earns more on each unit but sells fewer. Which effect wins? PED decides.
Raise the price: what happens to revenue?
Demand is elastic
Buyers leave in a bigger proportion than the price rose, so revenue falls.
Demand is inelastic
Buyers leave in a smaller proportion, so revenue rises.
Demand is unitary
The two % changes cancel out, so revenue stays the same.
And for a price cut
- A price cut works the other way round: it raises revenue only when demand is elastic.
- Compare the two percentage changes, never just "a big" or "a small" change.
Remember it as: Inelastic: price and revenue move together. Elastic: they move apart.
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Two goods, the same 25% price rise. Watch the revenue box.
Scenario 1: elastic demand
Price rises 25%
€4 → €5.
Buyers fall by more
100 → 60: more than 25%.
Revenue falls
Price × quantity is smaller.
Our example (made-up numbers)
| Before | After | |
|---|---|---|
| Price | €4 | €5 |
| Quantity | 100 | 60 |
| Revenue | €400 | €300 |
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Scenario 2: inelastic demand
Price rises 25%
€20 → €25.
Buyers fall by less
100 → 90: less than 25%.
Revenue rises
Price × quantity is bigger.
Our example (made-up numbers)
| Before | After | |
|---|---|---|
| Price | €20 | €25 |
| Quantity | 100 | 90 |
| Revenue | €2,000 | €2,250 |
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Paper 2 asked this in May 2024, for 3 marks: work out the new revenue from a PED figure. A cinema sells 1,000 tickets a week at €10. It cuts the price to €8. The price elasticity of demand for its tickets is −0.6. Calculate its revenue after the price change.
Four lines of working
% change in price
(8 − 10) ÷ 10 × 100 = −20%
% change in quantity
PED × % change in price = −0.6 × −20 = +12%
New quantity
1,000 × 1.12 = 1,120 tickets
New revenue
1,120 × €8 = €8,960: down from €10,000, because demand is inelastic
How the 3 marks are given
| You write | Marks |
|---|---|
| Any valid working: the % change in price, or PED used correctly | 1 |
| The new quantity | 1 |
| The new revenue | 1 |
| The right revenue with no working | 2 at most |
The points to remember
- Rearrange the formula: % change in Qd = PED × % change in price.
- Check the answer with the rule: does revenue move the way PED says it should?
Firms and governments both use PED to predict what a price change will do.
Who uses PED, and how
A firm setting its price
Inelastic demand: raise the price. Elastic: cut it. Either way, so revenue rises.
A government choosing what to tax
Taxes on goods with inelastic demand, such as petrol, cut sales only a little, so they raise a lot of revenue.
A government cutting a harmful good
Demand for cigarettes is inelastic, so a tax cuts smoking only a little and is often combined with other policies.
Farmers and miners
Demand for food and metals is inelastic, so a poor harvest raises prices sharply and incomes swing.
The points to remember
- PED is an estimate: it is hard to measure because other things change at the same time.
- PED changes over time: demand gets more elastic as buyers find substitutes.
See how examiners mark answers
Answer exam-style questions with model answers. Learn exactly what earns marks and what doesn't.
Quick reminder
- Curves: a flat D for elastic demand; D1, D2 and S when demand shifts
- Marks: P1, P2, Q1 and Q2, dashed lines from each dot
- Revenue is the box P × Q: shade what is gained and lost
- No numbers, no title
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Paper 2 also asks what a demand shift does to revenue. Draw D and S, then compare the two boxes.
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Paper 1 asked this in November 2023, as part (b) for 15 marks.
Using real-world examples, examine the importance of price elasticity of demand to firms and to governments.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
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What the diagrams must show
- Diagram 1: a steep D, the price rising P1 → P2 and Q1 → Q2, the revenue gained and lost boxes.
- Diagram 2: D, S and S + tax; P1 → P2, Q1 → Q2; the tax revenue box.
- Both: P and Q axes, every curve labelled.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 9 at most | Only firms or only governments, however good |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |