2.70455 · Section 2: The allocation of resources

Price elasticity of demand (PED)

Key learnings

PED: definition and formula
PED (price elasticity of demand) measures the responsiveness of quantity demanded to a change in price:

$\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

Quantity goes on top, price on the bottom. Since price and quantity move in opposite directions, PED is normally negative, but the sign is usually ignored — we judge the size. A PED of $0.16$ means a $1\%$ price change alters quantity by just $0.16\%$ : very unresponsive.
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The five PED categories
Ignoring the sign, the size of PED sorts demand:
- Elastic (PED $>1$ ): quantity changes by a larger % than price.
- Inelastic (PED $0$ – $1$ ): quantity changes by a smaller % than price.
- Unit-elastic (PED $=1$ ): same % as price.
- Perfectly inelastic (PED $=0$ ): vertical curve, quantity fixed.
- Perfectly elastic (PED infinite): horizontal curve, a price rise cuts quantity to zero.
Steeper curve = more inelastic, flatter = more elastic.
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What determines PED
Whether demand is elastic or inelastic depends on its determinants:
1. Substitutes — more close substitutes make demand more elastic.
2. Necessity or luxury — necessities inelastic, luxuries elastic.
3. Proportion of income — costly items more elastic, cheap ones inelastic.
4. Addictive — goods like cigarettes are inelastic.
5. Time period — more elastic in the long run.
An identify question wants these named, not a definition.

Common mistakes

Drawn from real examiner reports.

Inverting the PED formula or giving a %

Two slips recur. First, inverting the formula — dividing the % change in price by the % change in quantity — gives a wrong value; quantity must go on top. Second, giving the answer as a percentage ("16 per cent") when PED is a pure number with no units ( $0.16$ ): the percentages cancel. Always show working so one slip does not cost every mark.

November 2022 Paper 1 Q1(a): most candidates correctly calculated PED as -8 per cent / -50 per cent = 0.16, but a common error was giving the answer as "16 per cent", and another was inverting the formula.

Determinants asked, definition given

When a question asks what determines PED, examiners want the factors named — substitutes, necessity vs luxury, proportion of income, addictiveness, time period. A common error is to explain what elasticity means instead, or give vague answers like "wants and needs". Name each factor concisely — over-writing earns no extra credit.

November 2022 Paper 2 Q4(a): candidates explained what elasticity was rather than what determined it, gave vague answers ("wants" and "needs"), and wrote over-long answers when only identification was required.

PED confused with PES

PED and PES (price elasticity of supply) look similar arithmetically but describe opposite sides of the market: PED is the responsiveness of quantity demanded, PES of quantity supplied. Examiners note candidates defining inelastic demand when the question is about supply. Match it to the right curve — consumers buying = PED, producers selling = PES.

November 2022 Paper 2: the general comments note some candidates defined inelastic demand in answers to a supply question (Q4(c)) — match the elasticity concept to the correct curve.

Perfectly elastic vs perfectly inelastic

Students flip the two extremes. Perfectly inelastic demand has PED $=0$ and a vertical curve — quantity never changes as price moves (e.g. a life-saving medicine). Perfectly elastic demand has an infinite PED and a horizontal curve — any price rise cuts quantity to zero. Anchor it: inelastic = steep/vertical, elastic = flat/horizontal.

Thinking a price rise always cuts revenue

It is wrong to assume raising price always loses revenue. Total revenue = price × quantity. If demand is inelastic, a price rise raises TR because quantity falls only a little; only if demand is elastic does a price rise cut TR (quantity falls a lot). The direction depends on PED — state the category before predicting the revenue effect.

Exam tips

Structuring the 8-mark discuss (d)
The 8-mark discuss part carries the only AO3 marks. Develop arguments on each side with full reasoning, then reach a supported judgement. Application: inelastic demand means a price rise raises total revenue (price × quantity). Develop points, do not just state them.
Always show PED working
In a calculate question, write the formula, substitute the two percentages, then state the value and its category (elastic or inelastic). Showing working means a slip costs only one mark, not all of them — and lets the examiner award method marks.
Match depth to the command word
Paper 2 climbs a ladder: (a) define (2) — a precise sentence, (b) explain (4) — reasons developed, (c) analyse (6) — a cause-and-effect chain, (d) discuss (8) — both sides plus a judgement. Match effort to the command word; do not over-write or under-develop.
Quote the data in analyse answers
When a question says "using the source material", quote the figures — the % price and % quantity changes — and compute PED from them. An answer that never touches the given numbers stays generic and is capped in the lower band. Anchor each step to a figure from the extract.

Revision notes

What PED measures

PED (price elasticity of demand) measures how responsive the quantity demanded of a good is to a change in its price. It answers the question: when price changes by a certain percentage, by what percentage does quantity demanded change?

$\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

Because price and quantity demanded normally move in opposite directions (the law of demand), PED is usually a negative number. In iGCSE work the sign is often ignored and we focus on the size of the value.