Elasticities of demand and supply

IB Economics HL· Unit 2.15: Elasticities of demand and supply· 25 min read

1. Price Elasticity of Demand (PED) Core Concepts★★☆☆☆⏱ 5 min

PED measures how sensitive consumer purchasing decisions are to price changes, and is the most frequently tested elasticity metric across all IB Economics exam papers.

📘 Definition

Price Elasticity of Demand

$E_{d}$

The percentage change in quantity demanded of a good following a 1% change in its own price

Example:

A 10% price rise leading to a 5% quantity fall gives an absolute PED value of 0.5, classified as inelastic.

E_d = \frac{\% \Delta Q_d}{\% \Delta P}

📐 Worked Example

A bakery reduces the price of sourdough from $5 to $4, and weekly quantity demanded rises from 100 loaves to 130 loaves. Calculate PED.

1
Step 1: Calculate percentage change in quantity demanded
$\% \Delta Q_d = \frac{130 - 100}{100} \times 100 = +30\%$
2
Step 2: Calculate percentage change in price
$\% \Delta P = \frac{4 - 5}{5} \times 100 = -20\%$
3
Step 3: Divide and take absolute value
$E_d = \left| \frac{30\%}{-20\%} \right| = 1.5, classified as elastic demand$

✓ Quick check

Test your understanding of PED classification:

If PED = 0.3, what happens to total revenue when price rises by 20%?
- Revenue falls
- Revenue rises
- Revenue stays the same
- Revenue falls to zero
Reveal answer
Revenue rises —
Inelastic demand means price and total revenue move in the same direction.

Exam tip:

IB mark schemes always award 1 mark for stating the formula explicitly, even if you calculate the value mentally, so never skip this step for full points.

2. Income and Cross-Price Elasticity of Demand★★★☆☆⏱ 6 min

YED and XED are used to classify goods by their relationship to consumer income and other related goods, and are heavily tested in Paper 2 data response questions.

📘 Definition

Income Elasticity of Demand

$E_{y}$

The percentage change in quantity demanded following a 1% change in disposable consumer income

E_y = \frac{\% \Delta Q_d}{\% \Delta Y}

📘 Definition

Cross-Price Elasticity of Demand

$E_{x y}$

The percentage change in quantity demanded of Good A following a 1% change in price of Good B

E_{xy} = \frac{\% \Delta Q_{d,A}}{\% \Delta P_B}

📐 Worked Example

Average consumer income rises 8%, and demand for bus travel falls 3%. Calculate YED and classify the good.

1
Step 1: Substitute values into YED formula
$E_y = \frac{-3\%}{+8\%} = -0.375$
2
Step 2: Interpret the negative sign
$E_y < 0, so bus travel is classified as an inferior good in this market$

Exam tip:

For 15 mark essays, you must distinguish between necessity (YED 0-1) and luxury (YED >1) normal goods to access top evaluation marks.

3. Price Elasticity of Supply (PES)★★☆☆☆⏱ 4 min

PES measures how quickly firms can adjust production levels in response to price changes, and is particularly relevant for agricultural and primary commodity market analysis.

📘 Definition

Price Elasticity of Supply

$E_{s}$

The percentage change in quantity supplied of a good following a 1% change in its own market price

E_s = \frac{\% \Delta Q_s}{\% \Delta P}

📐 Worked Example

The price of coffee beans rises 20%, and global coffee supply increases 8% in the same harvest year. Calculate short-run PES.

1
Step 1: Substitute values into PES formula
$E_s = \frac{+8\%}{+20\%} = 0.4$
2
Step 2: Classify the value
$E_s < 1, so short-run coffee supply is inelastic$

4. Determinants of All Elasticity Types★★★☆☆⏱ 5 min

Each elasticity type has distinct, exam-testable determinants that explain why elasticity values vary widely across different goods and market contexts.

Elasticity Type	Key Determinants
PED	Number of close substitutes, proportion of income spent on good, time horizon, luxury vs necessity classification
YED	Consumer income bracket, good classification as necessity/luxury/inferior
XED	Degree of similarity between two goods, strength of complementary use cases
PES	Production spare capacity, inventory storage ability, time horizon, factor mobility

5. Elasticity Applications: Tax Incidence★★★★☆⏱ 5 min

✓ Calculator OK

The most high-stakes application of elasticities in IB exams is calculating the distribution of indirect tax burden between consumers and producers.

Methods compared

Tax incidence splits are determined by relative elasticity values:

Inelastic Demand, Elastic Supply

Consumers bear the majority of the tax burden, as they cannot easily reduce quantity demanded when price rises

Elastic Demand, Inelastic Supply

Producers bear the majority of the tax burden, as they cannot easily reduce production levels when after-tax revenue falls

📐 Worked Example

A $2 per unit tax is placed on cigarettes, where PED = 0.2 and PES = 2.8. What share of the tax burden falls on consumers?

1
Step 1: Use the relative elasticity tax incidence rule
$Consumer burden = \frac{PES}{PES + |E_d|} = \frac{2.8}{2.8 + 0.2} = 0.933$
2
Step 2: Calculate final burden
$Consumers pay 93% of the \$2 tax, or \$1.86 per unit$

6. Common Pitfalls

Wrong move:

Forgetting to take absolute value of PED values

Why:

PED is always negative due to the inverse law of demand, so the sign carries no useful information for classification

Correct move:

Explicitly state you are using the absolute value of PED before classifying it as elastic or inelastic

Wrong move:

Mixing up sign conventions for YED and XED

Why:

Confusing positive XED for substitutes with positive YED for normal goods leads to wrong classification

Correct move:

Label the elasticity type clearly before interpreting the sign of your calculated value

Wrong move:

Stating agricultural PES is elastic in the short run

Why:

Crops take months to grow, so supply cannot be adjusted immediately after a price change

Correct move:

Only classify PES as elastic for agricultural goods in the multi-year long run time horizon

Wrong move:

Claiming elastic demand leads to higher total revenue when price rises

Why:

Mixing up the inverse relationship between price and revenue for elastic vs inelastic demand curves

Correct move:

Use the rule that total revenue moves in the same direction as price for inelastic demand, and opposite for elastic demand

Wrong move:

Assigning 100% of tax burden to consumers for all goods

Why:

Failing to compare relative PED and PES values to split the tax incidence fairly

Correct move:

Always reference both elasticity values when explaining the distribution of tax burden in your exam response

7. Quick Reference Cheatsheet

Elasticity Type	Formula	Value Thresholds	Core Interpretation
PED	%ΔQd / %ΔP	<1 = Inelastic, >1 = Elastic	Determines revenue change from price shifts
YED	%ΔQd / %ΔY	<0 = Inferior, 0-1 = Necessity, >1 = Luxury	Classifies goods by income responsiveness
XED	%ΔQd of A / %ΔP of B	<0 = Complements, >0 = Substitutes	Measures cross-market good linkages
PES	%ΔQs / %ΔP	<1 = Inelastic, >1 = Elastic	Determines firm supply response to price changes

When this came up on past exams

AI-estimated based on syllabus patterns — cross-check with official past papers for accuracy. Use only as revision-focus signals.

2024 · Paper 1
10 mark PED revenue calculation
2023 · Paper 2
PES agricultural data response
2022 · Paper 3
Tax incidence elasticity split
2021 · Paper 1
15 mark YED evaluation for primary goods

What's Next

Mastering elasticities is the foundational skill for scoring full marks on IB HL Microeconomics data response and extended essay questions, as this concept underpins analysis of government intervention, market failure, and firm pricing strategy. You will now apply these elasticity frameworks to calculate tax and subsidy welfare impacts, evaluate the effectiveness of government price controls, and analyze how elasticity values shape outcomes for primary commodity markets that are a frequent case study in IB exams. This module also directly prepares you for the Paper 3 quantitative section where 6-8 marks are routinely allocated to elasticity calculation and interpretation tasks.