1.1.4 Elasticity
- Syllabus
- 2026
- Topic
- 1.1.4
- Level
- —
Learning objectives
1.1.4a Price elasticity of demand (PED)Definition of PED.1.1.4b PED formulaUse PED = percentage change in quantity demanded ÷ percentage change in price.1.1.4c Calculating PEDCalculate the PED using given percentage changes in quantity demanded and percentage changes in price.1.1.4d Price-elastic and price-inelastic demand diagramsThe use of diagrams to show price elastic and price inelastic demand.1.1.4e Interpreting PED valuesInterpret numerical values of PED that show:• perfect price inelasticity• price inelasticity• unitary price elasticity• price elasticity• perfect price elasticity.1.1.4f Factors influencing PEDThe factors influencing PED, including:• substitutes• degree of necessity• percentage of income spent on goods or service• time.1.1.4g PED and total revenueUse total-revenue calculations to show how a price change affects total revenue and determine whether demand is price elastic or price inelastic.1.1.4h Price elasticity of supply (PES)Definition of PES.1.1.4i PES formulaUse PES = percentage change in quantity supplied ÷ percentage change in price.1.1.4j Calculating PESCalculate the PES using given percentage changes in quantity supplied and percentage changes in price.1.1.4k Price-elastic and price-inelastic supply diagramsThe use of diagrams to show price elastic and price inelastic supply.1.1.4l Interpreting PES valuesInterpret numerical values of PES that show:• perfect price inelasticity• price inelasticity• unitary price elasticity• price elasticity• perfect price elasticity.1.1.4m Factors influencing PESThe factors influencing PES, including:• factors of production• availability of stocks• spare capacity• time.1.1.4n PES of manufactured and primary productsUse examples to show the likely price elasticity of supply for manufactured products and primary products.1.1.4o Income elasticity of demandDefinition of income elasticity of demand.1.1.4p Income elasticity of demand formulaUse income elasticity of demand = percentage change in quantity demanded ÷ percentage change in income.1.1.4q Calculating income elasticity of demandCalculate the income elasticity of demand using given percentage changes in quantity demanded and percentage changes in income.1.1.4r Interpreting income elasticity valuesInterpret numerical values of income elasticity of demand that show:• luxury goods• normal goods• inferior goods.1.1.4s Business and government uses of demand elasticitiesThe significance of price and income elasticities of demand to businesses and the government, in terms of:• the imposition of indirect taxes and subsidies• changes in income.
Measure how demand responds to price
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price.
PED compares percentage changes so responsiveness can be compared across products measured in different units. Demand is more price responsive when a given percentage price change produces a larger percentage change in quantity demanded.
PED concerns movement along a demand curve caused by the product's own price. It does not measure a demand-curve shift caused by income, tastes or related-good prices.
Use the PED formula
PED=% change in price% change in quantity demanded
Use percentage changes for both numerator and denominator. Because price and quantity demanded usually move in opposite directions, PED is normally negative.
The same relationship can be rearranged: percentage change in quantity demanded = PED × percentage change in price. For PED = −1.9 and a 10% price fall, the quantity change is (−1.9) × (−10%) = +19%.
Do not mix an absolute quantity change with a percentage price change; both parts of the ratio must be percentages.
Calculate PED and interpret the sign
PED=+1.6%−2.1%=−1.3125≈−1.31
First assign signs from direction: the price rose by 1.6%, while quantity demanded fell by 2.1%. Divide the percentage change in quantity demanded by the percentage change in price, then round only the final result.
The magnitude is greater than 1, so demand is price elastic: quantity demanded changed proportionally more than price.
Classification uses the absolute magnitude, but retain the negative sign when reporting PED unless the question or convention explicitly uses magnitude only.
Recognise elastic and inelastic demand curves
A price-elastic demand curve shows a proportionally large quantity response to a price change; a price-inelastic curve shows a proportionally small quantity response.
| Same proportional price change | Quantity response | Diagram appearance in a like-for-like sketch |
|---|---|---|
| elastic demand, | PED | > 1 |
| inelastic demand, | PED | < 1 |
Label price vertically and quantity horizontally, draw one downward-sloping D curve, and mark two price and quantity readings so the relative percentage changes are visible.
Steepness is reliable only when axes and scales are comparable. Elasticity is defined by percentage responsiveness, not angle alone.
Classify PED values
| PED magnitude | Classification | Quantity response to a price change |
|---|---|---|
| 0 | perfectly price inelastic | quantity demanded does not change |
| between 0 and 1 | price inelastic | proportionally smaller |
| 1 | unitary price elastic | same proportion |
| greater than 1 | price elastic | proportionally larger |
| infinity | perfectly price elastic | any price rise reduces demand to zero in the model |
PED is usually negative; classification normally uses |PED|. Thus −0.5 is inelastic and −1.5 is elastic.
A positive PED value is not the standard downward-sloping demand relationship. Do not call +1 perfectly elastic; perfect elasticity is represented by an infinite magnitude.
Explain what makes demand price elastic
| Factor | More elastic when… | Why |
|---|---|---|
| substitutes | close alternatives are available | consumers can switch after a price rise |
| necessity | the product is less necessary | consumption is easier to postpone or avoid |
| share of income | spending takes a larger share | the price change matters more to the budget |
| time | consumers have longer to adjust | they can search, switch or change habits |
Demand for a soft drink may become more elastic over six months as consumers discover substitutes and have time to alter routines.
These factors influence responsiveness rather than shifting demand by themselves in the PED calculation. State the causal route, not just a memorised factor.
Connect PED, price and total revenue
Total revenue=price×quantity sold
| Demand type | Price rises | Price falls |
|---|---|---|
| elastic, | PED | > 1 |
| inelastic, | PED | < 1 |
| unitary, | PED | = 1 |
If an inelastic product sells 50 units at 3,000,totalrevenueis150,000. A price rise would normally increase total revenue because the percentage quantity loss is smaller than the percentage price gain.
This relationship concerns total revenue, not profit. Costs may change, so higher revenue does not guarantee higher profit.
Measure how supply responds to price
Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price.
PES asks how strongly producers adjust output offered for sale when the product's own price changes. A larger percentage output response means more elastic supply.
PES describes movement along a supply curve. A change in costs, technology, taxes, subsidies or weather shifts supply and is not itself the price change measured by PES.
Use the PES formula
PES=% change in price% change in quantity supplied
Quantity supplied and price normally move in the same direction, so PES is normally positive. Use percentage changes so responsiveness is independent of the units used.
Percentage change in quantity supplied = PES × percentage change in price. If PES is 1.5 and price rises by 12%, quantity supplied rises by 18%.
Use quantity supplied, not quantity demanded, in the numerator.
Calculate PES
PES=+4.9%+2.7%=0.551…≈0.55
Record the percentage change in quantity supplied, divide by the percentage change in price, and round at the end. Both changes are positive here because higher price encourages greater quantity supplied.
PES = 0.55 is price inelastic: quantity supplied changes proportionally less than price.
If both price and quantity supplied fall, dividing two negative changes still gives a positive PES. Do not classify it as negative elasticity.
Recognise elastic and inelastic supply curves
Price-elastic supply shows a proportionally large output response to a price change; price-inelastic supply shows a proportionally small output response.
| Same proportional price change | Quantity response | Like-for-like sketch |
|---|---|---|
| elastic supply, PES > 1 | larger proportional change | relatively flatter S |
| inelastic supply, PES < 1 | smaller proportional change | relatively steeper S |
Label price and quantity axes, draw an upward-sloping S curve, and mark P1, P2, Q1 and Q2 so the relative changes can be compared.
Curve angle alone is not a universal elasticity test because scale matters; compare percentage changes or diagrams with identical axes and scales.
Classify PES values
| PES | Classification | Quantity response |
|---|---|---|
| 0 | perfectly price inelastic | no response; vertical supply |
| between 0 and 1 | price inelastic | proportionally smaller |
| 1 | unitary price elastic | same proportion |
| greater than 1 | price elastic | proportionally larger |
| infinity | perfectly price elastic | horizontal supply in the model |
A PES of 1.5 is price elastic; a PES of 0.5 is inelastic.
Perfectly inelastic supply is PES = 0, not a very large number. Perfectly elastic supply is the infinite limiting case.
Explain what makes supply price elastic
| Factor | More elastic when… | Why output can adjust |
|---|---|---|
| factors of production | inputs are mobile and easy to obtain | firms can expand production quickly |
| stocks | finished stocks are available | firms can release goods without waiting for production |
| spare capacity | unused labour or machinery exists | output can rise without new facilities |
| time | producers have longer to respond | capacity, labour and inputs can be changed |
Supply becomes more inelastic when inputs are specialised, stocks are perishable or absent, capacity is full, or the response period is short.
A factor must change the ease or speed of output adjustment. It does not automatically change the current quantity supplied unless price changes.
Compare manufactured and primary-product supply
| Product type | Likely PES | Main reason |
|---|---|---|
| manufactured product with stocks and spare factory capacity | more elastic | stock can be released and output expanded relatively quickly |
| primary agricultural product in the short run | more inelastic | growing seasons, weather, land and biological production times limit rapid response |
| either product over a longer period | usually more elastic | firms can change capacity, inputs or production plans |
A textile factory operating below capacity can raise shirt output after a price increase more readily than an avocado grower can produce a new crop immediately.
Product category is a guide, not a guarantee. Stocks, perishability, spare capacity and time can make a particular manufactured or primary product differ from the usual pattern.
Measure demand's response to income
Income elasticity of demand (YED) measures how responsive quantity demanded is to a change in consumer income.
YED compares percentage changes in demand and income. Its sign reveals whether demand moves with income or against it, while its magnitude shows the strength of the response.
YED concerns an income-driven shift of the demand curve. It is not PED, which measures movement along demand caused by the product's own price.
Use the YED formula
YED=% change in income% change in quantity demanded
Keep the direction signs: demand rising with income gives positive YED; demand falling as income rises gives negative YED.
Percentage change in quantity demanded = YED × percentage change in income. This helps businesses forecast demand after an expected income change.
The denominator is percentage change in income, not price.
Calculate YED
YED=+7%+11%=1.571…≈1.57
Assign signs, divide the percentage change in quantity demanded by the percentage change in income, and round only the final answer.
The result is positive and greater than 1, so the product is a luxury good in the YED classification: demand rises proportionally more than income.
Do not remove a negative sign before classification; it distinguishes inferior goods from normal goods.
Classify goods using YED
| YED value | Classification | Response when income rises |
|---|---|---|
| greater than 1 | luxury good | demand rises proportionally more |
| between 0 and 1 | normal necessity | demand rises proportionally less |
| less than 0 | inferior good | demand falls as consumers switch away |
YED = 0.7 identifies a normal good; YED = 1.6 identifies a luxury; YED = −0.9 identifies an inferior good.
In this classification, 'inferior' describes the direction of demand after an income change, not poor quality. A YED of exactly 1 is positive unit income elasticity, not greater-than-one luxury responsiveness.
Use elasticities for business and government decisions
| Decision | Relevant elasticity | How it informs the decision |
|---|---|---|
| business changes price | PED | predicts quantity and total-revenue response |
| business forecasts income growth or recession | YED | predicts which products gain or lose demand |
| government imposes an indirect tax | PED | inelastic demand sustains quantity and tax revenue more strongly; consumers may bear more of the price rise |
| government subsidises a product | PED | predicts how strongly lower prices may expand consumption |
Transport operators can use YED to forecast how rising incomes affect bus or rail demand; government can use PED when judging whether a tax will sharply reduce consumption or mainly raise revenue.
Elasticity is evidence for a decision, not the whole decision. Costs, objectives, distributional effects, time horizon and the reliability of estimates may change the final choice.