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This lesson covers the final part of AQA A-Level Business topic 3.3.2 — price elasticity of demand (PED) and income elasticity of demand (YED). You will learn how to calculate and interpret elasticity, understand the factors that determine it, and evaluate its significance for business decision-making.
Key Definition: Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. It tells businesses how sensitive their customers are to price changes.
PED = % change in quantity demanded / % change in price
PED is almost always negative because of the inverse relationship between price and quantity demanded (the law of demand). However, by convention in business studies, PED is often expressed as a positive number (the absolute value).
| PED Value | Classification | Meaning | Business Implication |
|---|---|---|---|
| PED > 1 | Elastic | Demand is highly responsive to price changes — a small price change causes a proportionately larger change in quantity demanded | Price increases reduce total revenue; price cuts increase total revenue |
| PED = 1 | Unit elastic | Demand changes proportionately to price | Total revenue is unchanged by price changes |
| PED < 1 | Inelastic | Demand is unresponsive to price changes — a price change causes a proportionately smaller change in quantity demanded | Price increases raise total revenue; price cuts reduce total revenue |
| PED = 0 | Perfectly inelastic | Demand does not change at all when price changes | Any price can be charged without affecting demand (rare in practice) |
A cinema increases its ticket price from £10.00 to £12.00. Weekly ticket sales fall from 5,000 to 4,200.
Since |PED| < 1, demand is price inelastic. The cinema's total revenue increases:
Exam Tip: Always show your working clearly in PED calculations. State the formula, substitute the values, and interpret the result. Then explain the implication for total revenue — this is where the marks are.
| Factor | Effect on PED | Explanation |
|---|---|---|
| Availability of substitutes | More substitutes → more elastic | If close substitutes exist, consumers can easily switch when prices rise (e.g., Coca-Cola vs Pepsi) |
| Necessity vs luxury | Necessities → inelastic; luxuries → elastic | Consumers cannot easily reduce consumption of necessities (e.g., insulin, electricity) |
| Proportion of income | Higher proportion → more elastic | Consumers are more sensitive to price changes for expensive items (e.g., cars) than cheap items (e.g., salt) |
| Time period | Longer time → more elastic | Consumers have more time to find substitutes, change habits, or switch suppliers |
| Brand loyalty | Stronger loyalty → more inelastic | Loyal customers are less likely to switch when prices rise (e.g., Apple iPhone users) |
| Addictive products | Addiction → more inelastic | Consumers of addictive goods (cigarettes, alcohol) continue to buy despite price increases |
| Breadth of definition | Narrow definition → more elastic | Demand for "Kellogg's Corn Flakes" is more elastic than demand for "breakfast cereals" as a category |
| PED | Price Increase | Price Decrease |
|---|---|---|
| Elastic (>1) | Revenue falls | Revenue rises |
| Unit elastic (=1) | Revenue unchanged | Revenue unchanged |
| Inelastic (<1) | Revenue rises | Revenue falls |
Real-World Example: In 2023, many UK supermarkets reduced the price of own-brand products while raising the price of premium branded goods. This strategy reflects PED: own-brand products face elastic demand (many substitutes), so lower prices attract more volume. Premium brands face more inelastic demand (brand loyalty), so price increases generate additional revenue.
Businesses can increase their pricing power by making demand more inelastic:
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