Elasticity

Edexcel International GCSE Economics· 1.1.4· 25 min read

1. 1. Price Elasticity of Demand (PED)★★☆☆☆⏱ 6 min

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📘 Definition

Price Elasticity of Demand (PED)

$P E D = \frac{%Δ Q _{d}}{%Δ P}$

Measure of how much quantity demanded of a good responds to a change in its own price

Example:

If a 10% price rise leads to a 5% fall in quantity demanded, PED = -0.5

PED is always negative due to the inverse relationship between price and quantity demanded (law of demand). You can interpret values using the following scale:

Perfectly inelastic: $P E D = 0$ (quantity demanded does not change when price changes)
Inelastic: $∣ P E D ∣ < 1$ (quantity changes less than proportionally to price)
Unitary elastic: $∣ P E D ∣ = 1$ (quantity changes proportionally to price)
Elastic: $∣ P E D ∣ > 1$ (quantity changes more than proportionally to price)
Perfectly elastic: $P E D = \infty$ (quantity demanded falls to zero if price rises even slightly)

📐 Worked Example

The price of milk rises by 15% and quantity demanded falls by 3%. Calculate PED and interpret the value.

1
Step 1: Recall the PED formula
$PED = \frac{\% \Delta Q_d}{\% \Delta P}$
2
Step 2: Substitute given values
$PED = \frac{-3\%}{+15\%} = -0.2$
3
Step 3: Interpret: $∣ - 0.2∣ < 1$ , so demand for milk is price inelastic.

Four key factors influence PED: availability of close substitutes, degree of necessity of the good, percentage of consumer income spent on the good, and time period allowed for consumers to adjust to price changes.

Exam tip:

When drawing PED diagrams, always label axes (Price = y, Quantity = x) and explicitly label the curve as elastic or inelastic to secure all available marks.

2. 2. PED and Total Revenue★★★☆☆⏱ 5 min

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📘 Definition

Total Revenue (TR)

$T R = P \times Q$

Total income a firm generates from selling its goods, before subtracting costs

The impact of a price change on total revenue depends entirely on PED:

If demand is elastic: Price rise → TR falls; Price cut → TR rises
If demand is inelastic: Price rise → TR rises; Price cut → TR falls
If demand is unitary elastic: Price change has no impact on TR

📐 Worked Example

A bakery cuts the price of croissants from £2 to £1.80, and quantity sold rises from 50 per day to 75 per day. Calculate the change in TR and state if demand is elastic or inelastic.

1
Step 1: Calculate original TR
$TR_{original} = 2 \times 50 = £100$
2
Step 2: Calculate new TR
$TR_{new} = 1.80 \times 75 = £135$
3
Step 3: Change in TR = £135 - £100 = +£35. Price fell and TR rose, so demand is price elastic.

Exam tip:

For questions linking price changes to total revenue, always show both original and new TR calculations before stating the PED classification to get full marks.

3. 3. Price Elasticity of Supply (PES)★★☆☆☆⏱ 5 min

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📘 Definition

Price Elasticity of Supply (PES)

$P E S = \frac{%Δ Q _{s}}{%Δ P}$

Measure of how much quantity supplied of a good responds to a change in its own price

PES is always positive due to the direct relationship between price and quantity supplied (law of supply). The value interpretation scale is identical to PED. Steeper supply curves = more inelastic; flatter curves = more elastic.

Key factors influencing PED: mobility of factors of production, availability of finished goods stocks, amount of spare production capacity, and time period allowed for producers to adjust output.

📐 Worked Example

The price of corn rises by 20% and quantity supplied increases by 4% in the short run. Calculate PES and explain why the value is low.

1
Step 1: Apply PES formula
$PES = \frac{+4\%}{+20\%} = 0.2$
2
Step 2: 0.2 < 1, so supply of corn is price inelastic.
3
Step 3: Low PES because corn is a primary agricultural good that takes months to grow, so producers cannot increase output quickly in the short run.

Exam tip:

When comparing PES of primary and manufactured goods, always reference at least one influencing factor (e.g. production time lags for agricultural goods) to support your answer.

4. 4. Income Elasticity of Demand (YED)★★★☆☆⏱ 4 min

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📘 Definition

Income Elasticity of Demand (YED)

$Y E D = \frac{%Δ Q _{d}}{%Δ Y}$

Measure of how much quantity demanded of a good responds to a change in consumer income

Negative YED: Inferior good (demand falls as income rises, e.g. value supermarket goods)
Positive YED < 1: Normal necessity good (demand rises slower than income, e.g. toothpaste)
Positive YED > 1: Luxury good (demand rises faster than income, e.g. international holidays)

📐 Worked Example

Average household income rises by 10% and demand for budget takeaway meals falls by 5%. Calculate YED and classify the good.

1
Step 1: Apply YED formula
$YED = \frac{-5\%}{+10\%} = -0.5$
2
Step 2: Negative YED means budget takeaway is an inferior good.

5. 5. Significance of Elasticity for Businesses and Governments★★★★☆⏱ 5 min

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Elasticity data is used for key strategic decisions by both firms and governments:

Businesses: Use PED to set pricing strategies (raise prices for inelastic goods to boost revenue, cut prices for elastic goods to increase sales volume). Use YED to plan production during economic booms and recessions.
Governments: Use PED when imposing indirect taxes: taxes on inelastic goods (cigarettes, petrol) raise more revenue and cause smaller falls in quantity demanded. Use YED to forecast demand for public services during periods of income change.

📐 Worked Example

Explain why a government would choose to tax petrol rather than designer clothing to raise revenue.

1
Step 1: Petrol has price inelastic demand (few substitutes, necessary for transport for most households).
2
Step 2: A tax on petrol will lead to a small fall in quantity demanded, so the government will raise large tax revenue, while also incentivizing small reductions in carbon emissions.
3
Step 3: Designer clothing has elastic demand, so a tax would lead to a large fall in sales, raising very little revenue and harming clothing retailers.

Exam tip:

For evaluate questions, always include a counterpoint: e.g. while taxes on inelastic goods raise high revenue, they may disproportionately harm low-income households.

6. Common Pitfalls

Wrong move:

Forgetting the negative sign for PED and YED in calculations

Why:

The negative sign signals the inverse relationship between price and demand for PED, and inferior good status for YED. Omitting it leads to incorrect interpretation of values.

Correct move:

Always include the sign unless the question explicitly asks for the absolute value.

Wrong move:

Mixing up PED and PES formulas or influencing factors

Why:

Both use % change in quantity over % change in price, but PED refers to quantity demanded while PES refers to quantity supplied, and their influencing factors are distinct.

Correct move:

Label $Q_{d}$ and $Q_{s}$ explicitly in formulas, and memorize factor lists separately for PED and PES.

Wrong move:

Drawing inelastic curves as flat and elastic curves as steep

Why:

Steeper curves mean quantity changes very little for a given price change, which is the definition of inelastic, not elastic.

Correct move:

Use the mnemonic: Flat = Flexible = Elastic; Steep = Stuck = Inelastic.

Wrong move:

Stating that price increases always raise total revenue

Why:

This is only true if demand is inelastic. If demand is elastic, a price increase will lead to a large fall in quantity sold, reducing total revenue.

Correct move:

Always link price changes to total revenue via the PED value before drawing a conclusion.

Wrong move:

Confusing YED value interpretations for normal/inferior goods

Why:

Mixing up positive and negative YED values leads to incorrect classification of good types, losing marks on interpretation questions.

Correct move:

Use the mnemonic: N-I-P (Normal = Positive, Inferior = Negative), and YED > 1 = Luxury good.

7. Quick Reference Cheatsheet

Elasticity Type	Core Formula	Value Interpretations	Key Influencing Factors
PED	$\frac{%Δ Q _{d}}{%Δ P}$	<1 Inelastic, =1 Unitary, >1 Elastic, 0 Perfectly Inelastic, ∞ Perfectly Elastic	Substitutes, Necessity, % of income spent, Time
PES	$\frac{%Δ Q _{s}}{%Δ P}$	<1 Inelastic, =1 Unitary, >1 Elastic, 0 Perfectly Inelastic, ∞ Perfectly Elastic	Factor mobility, Stocks, Spare capacity, Time
YED	$\frac{%Δ Q _{d}}{%Δ Y}$	<0 Inferior, 0<YED<1 Normal Necessity, >1 Luxury	N/A

8. Frequently Asked

Do I need to include the negative sign for PED in calculations?

Yes, unless the question explicitly asks for the absolute value. The negative sign shows the inverse relationship between price and quantity demanded, and is required for full marks.

How do I remember the difference between elastic and inelastic curves?

Use the mnemonic: Flat = Flexible (quantity changes a lot) = Elastic; Steep = Stuck (quantity barely changes) = Inelastic.

Is cross elasticity of demand (XED) examinable for 4EC1?

No, XED is not part of the 4EC1 specification. Only PED, PES and YED are assessed.

Going deeper

syllabusEdexcel 4EC1 SpecificationRefer to section 1.1.4 for official elasticity requirements

What's Next

Now that you have mastered elasticity concepts, you can apply this knowledge to analyse how demand and supply shifts affect market outcomes, including the impact of government interventions like indirect taxes and subsidies. Elasticity is a foundational concept for later topics in market failure and business strategy, so solidifying your understanding now will help you score high marks on extended response questions in Paper 1. Be sure to practice past paper calculation and diagram questions to build speed and accuracy for your exam.