Price Elasticity of Demand (Years 9–11) — Economics

PED, the formula, elastic versus inelastic demand, and why it matters for a firm's revenue.

Price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to a change in its price. The law of demand tells us quantity falls when price rises; PED tells us by how much.

Why this matters A shopkeeper deciding whether to raise a price needs to know if customers will barely notice or desert in droves. PED turns that judgement into a number and predicts what happens to total revenue.

The formula

PED = percentage change in quantity demanded ÷ percentage change in price. Because quantity and price usually move in opposite directions, PED is negative, but at IGCSE we normally quote the size of the number (its absolute value) and ignore the minus sign.

Common exam mistake: getting flustered by the negative sign. Since demand obeys an inverse relationship, PED is technically negative - but IGCSE always compares the absolute (positive) value against 1 to judge elastic, inelastic or unit-elastic. Do not let the sign change your conclusion.

Elastic, inelastic and unit-elastic

Value of PED	Meaning
Greater than 1	Elastic — quantity is very responsive
Less than 1	Inelastic — quantity is not very responsive
Exactly 1	Unit-elastic — they change in equal proportion

The steeper the curve, the less responsive quantity is to price - inelastic demand barely reacts, elastic demand reacts strongly.

What makes demand elastic?

Substitutes: many close substitutes make demand elastic; few make it inelastic.
Necessity or luxury: necessities tend to be inelastic; luxuries more elastic.
Share of income: goods taking a large share of income are more elastic.
Time: demand is usually more elastic over a longer period as buyers adjust.

PED and total revenue

Total revenue = price × quantity. If demand is inelastic, a price rise increases total revenue (quantity falls by proportionally less). If demand is elastic, a price rise reduces total revenue (quantity falls by proportionally more). This is why firms selling goods with few substitutes can raise prices, while those in competitive markets cannot.

Exam technique: learn the revenue rule as one sentence: "inelastic demand – price and revenue move together; elastic demand – price and revenue move oppositely." Quoting this exact relationship is often worth a method mark on its own.

Put these steps in order to calculate and interpret PED:

Find the percentage change in quantity demanded
Find the percentage change in price
Divide the quantity percentage by the price percentage
Ignore the minus sign and compare the answer to 1
State whether demand is elastic, inelastic or unit-elastic

Worked check: if price rises 10% and quantity demanded falls 20%, PED = 20 ÷ 10 = 2 (elastic).

When you calculate PED, always divide the quantity percentage by the price percentage, never the other way round — swapping them is a frequent mistake. Then compare your answer to 1: above 1 is elastic, below 1 is inelastic, and exactly 1 is unit-elastic. Finally, if the question asks about revenue, remember the simple rule that with inelastic demand price and revenue move together, while with elastic demand they move in opposite directions. Working carefully through these three steps will keep your elasticity answers accurate.