Key Idea: Price goes up, people buy less. The question this topic asks is how much less. That one number, elasticity, decides whether a price rise brings in more money or less, and what a tax will do. Three elasticities, one shape of formula: percentage change in quantity demanded ÷ percentage change in something else. Where you meet it:
Paper 1
- Essays.
- Explain [10]: two determinants of PED, or PED against YED.
- Evaluate [15]: does knowing PED help a firm raise revenue?
Paper 2
- Data response.
- Calculate [2 or 3]: PED or YED from the data, or a quantity change from a given figure.
- Explain [4] with a diagram: what a supply shift does to revenue when demand is inelastic.
Every later unit
- The same number, a new job.
- Who pays a tax, what a subsidy costs, how export earnings move: all run on elasticity.
📐 PED: how much quantity moves when price moves
Price elasticity of demand measures how much quantity demanded responds to a change in the good's own price.
- price elasticity of demand (no units)
- percentage change in quantity demanded
- percentage change in the good's own price
| Size (ignoring the sign) | Demand is… | Curve | Example |
|---|---|---|---|
| more than 1 | elastic: quantity moves more than price | flatter | one brand of energy drink; five others sit next to it |
| less than 1 | inelastic: quantity moves less than price | steeper | insulin; petrol for the week's commute |
| exactly 1 | unit elastic: the two changes match | in between | revenue does not change when the price changes |
Along a straight-line demand curve the number changes: elastic near the top, inelastic near the bottom, unit elastic in the middle. A single PED figure is a reading at one point. So when you sketch, draw elastic demand flatter and inelastic demand steeper, side by side if you can.
🎯 What makes demand elastic or inelastic
Five things decide how sensitive buyers are. Use them to explain an elasticity, never just to label it.
| Determinant | Demand is more elastic when… | Example |
|---|---|---|
| Substitutes | there are many close ones to switch to | butter has margarine; insulin has nothing |
| Necessity or luxury | the good is a luxury you can do without | a holiday, not electricity |
| Share of income | it takes a big slice of your income | a car, not a box of matches |
| Time | buyers have had longer to find alternatives | petrol: stuck this month, a smaller car next year |
| Habit or addiction | it is not habit-forming | cigarettes stay inelastic whatever the price |
Important: Demand is inelastic earns nothing on its own. Say why: demand for insulin is inelastic because there is no substitute and it is a medical necessity. Use a real good. Good X says less than insulin.
💰 PED and total revenue
Revenue = price × quantity. Raise the price and you gain on every unit but lose some units. Which effect wins is exactly what PED tells you. This is the most examined idea in Unit 2.
| Demand is… | Raise the price | Cut the price |
|---|---|---|
| inelastic | revenue rises: the price gain beats the units lost | revenue falls |
| elastic | revenue falls: too many buyers leave | revenue rises: the extra units beat the lower price |
| unit elastic | revenue unchanged | revenue unchanged |
Firms: a sale only works on an elastic good. Cinemas discount the ticket and charge a lot for the popcorn. Governments: a tax on an inelastic good (cigarettes, petrol) raises a lot of revenue but does not cut use much. Both halves of that sentence are an evaluation point. Revenue is not profit. If the question says revenue, stay off costs.
💵 YED: how demand moves with income
Income elasticity of demand measures how much quantity demanded responds to a change in income. Here the sign carries the meaning.
- income elasticity of demand (no units)
- percentage change in quantity demanded
- percentage change in income
| YED | Type of good | As incomes rise… | Example |
|---|---|---|---|
| negative | inferior | people buy less and switch to something they prefer | bus travel, own-brand food |
| between 0 and 1 | normal, a necessity | people buy a little more | bread, electricity |
| above 1 | normal, a luxury | people buy a lot more | restaurant meals, holidays |
For YED the sign carries the meaning: positive normal, negative inferior. For PED the size does. Your notes also cover XED, cross elasticity: the quantity of one good against the price of another. Positive means substitutes, negative means complements. It has not appeared in recent papers; know the sign rule and move on.
🔢 Doing the sums
Every elasticity calculation is the same four moves.
From the data to the answer
- Percentage change — (new − old) ÷ old × 100, for the quantity and for the price or income. Always divide by the old value.
- Divide — Quantity change on top, the other change underneath.
- Keep the sign, say what it means — Negative PED is normal, so compare the size. Negative YED means an inferior good.
- No units — Elasticity is a pure number. Writing € or % after it is wrong. Show the working even when the answer is one number.
Percent → divide → sign → no units
Important: Dividing by the new value instead of the old. And being handed a PED and asked for a quantity change: rearrange first. %ΔQ = PED × %ΔP.
✍️ Worked examples
The four shapes this topic is asked in, with new scenarios. Try each before opening the plan.
A streaming service raises its monthly price from €10 to €12. Subscribers fall from 5 000 to 4 500. Calculate the price elasticity of demand and state whether demand is elastic or inelastic.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the diagram question.
A poor harvest cuts the supply of onions. Demand for onions is price inelastic. Using a demand and supply diagram, explain the effect on the total revenue of onion growers.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Animated graph
Watch the graph build step by step in study mode.
Income next.
Average incomes in a country rise by 5%. Over the same period the quantity of restaurant meals demanded rises by 8%. Calculate the income elasticity of demand for restaurant meals and identify the type of good.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the Paper 1 shape.
Using examples, explain how the proportion of income spent on a good and the time period considered affect its price elasticity of demand.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
Price rises 10% and quantity demanded falls 4%. Elastic or inelastic? PED = −4 ÷ 10 = −0.4. Ignoring the sign, less than 1: inelastic.
Demand is elastic. What does a price cut do to revenue? Revenue rises. The extra units sold outweigh the lower price on each one. That is why sales work on elastic goods.
Why is demand for one brand of trainers more elastic than for trainers in general? Substitutes. Other brands sit next to it on the shelf. There is no close substitute for trainers as a whole.
YED is −0.3. What kind of good? Inferior. As incomes rise, people buy less of it. Bus travel and own-brand food are safe examples.
YED is +2.0. What kind of good? Normal and income-elastic: a luxury. Demand rises twice as fast as income.
Why do governments tax cigarettes so heavily? Demand is inelastic, so the tax raises a lot of revenue and smokers keep buying. The same fact means the tax does little to cut smoking.
Where on a straight-line demand curve is demand elastic? Near the top: high price, low quantity. Near the bottom it is inelastic, and the midpoint is unit elastic.
PED is −0.8 and the price falls by 10%. What happens to quantity demanded? %ΔQ = PED × %ΔP = −0.8 × −10% = +8%. Quantity rises by 8%.
Exam tips
- PED is negative. Say ignoring the sign and compare the size. Do not quietly drop the minus.
- For YED the sign is the meaning. For PED the size is.
- Percentage change is always (new − old) ÷ old × 100. Elasticity has no units.
- Explain an elasticity with its determinants and a real good. Demand is inelastic on its own earns nothing.
- Revenue = price × quantity. Work a numerical example: a 10% rise against a 4% fall is more convincing than revenue would rise.
- Elastic is a flatter curve, inelastic a steeper one. Sketch both side by side when comparing.
- Revenue is not profit. If the question says revenue, stay off costs.