📐 Price Elasticity of Demand
Definition: PED (Price Elasticity of Demand) tells you HOW MUCH quantity demanded changes when price changes.
The formula
PED = % change in quantity demanded ÷ % change in price
PED is almost always negative (because of the law of demand — price up, Qd down). In the IB, we often ignore the sign and use the absolute value.
Interpreting the value
- |PED| > 1 → Elastic — Qd changes by MORE than price (sensitive to price)
- |PED| < 1 → Inelastic — Qd changes by LESS than price (insensitive to price)
- |PED| = 1 → Unit elastic — Qd changes by exactly the same % as price
- |PED| = 0 → Perfectly inelastic — Qd does not change at all (vertical D curve)
- |PED| = ∞ → Perfectly elastic — any price change causes infinite Qd change (horizontal D curve)
May 2024 Paper 2 Q1b(i) asked students to calculate PED from given data. If price rises 10% and Qd falls 20%, PED = -20%/10% = -2. The absolute value is 2, so demand is elastic.
🎯 What Makes Demand Elastic or Inelastic?
Five main factors determine whether demand is elastic (responsive) or inelastic (unresponsive):
- Number and closeness of substitutes — MORE substitutes → MORE elastic. Butter (many alternatives) is elastic; insulin (no substitute) is inelastic
- Necessity vs luxury — necessities are inelastic (you need them regardless). Luxuries are elastic (you can live without them)
- Proportion of income — goods that take a large share of income are more elastic (a 10% rise in house prices matters more than a 10% rise in pen prices)
- Time — demand is MORE elastic over time (consumers find alternatives)
- Habit/addiction — addictive goods (cigarettes, coffee) are inelastic
In the exam, use the determinants to EXPLAIN why a product has the elasticity it does. Do not just state 'demand is inelastic' — say 'demand for insulin is inelastic because there are no substitutes and it is a medical necessity.'
See how examiners mark answers
Access past paper questions with model answers. Learn exactly what earns marks and what doesn't.
Try Exam Vault Free7-day free trial • No card required
📊 PED on Diagrams
The steepness of the demand curve gives a rough visual guide to elasticity (though not a perfect one):
- Flatter demand curve → MORE elastic (small price change causes big Qd change)
- Steeper demand curve → MORE inelastic (big price change causes small Qd change)
- Vertical demand curve → perfectly inelastic (PED = 0)
- Horizontal demand curve → perfectly elastic (PED = ∞)
Be careful: elasticity changes along a straight-line demand curve! At the top (high price, low quantity) demand is elastic. At the bottom (low price, high quantity) it is inelastic. The midpoint is unit elastic.
For exam diagrams: if a question asks you to draw elastic demand, make the curve relatively flat. For inelastic demand, make it relatively steep.