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This lesson covers price elasticity of demand — a measure of the responsiveness of quantity demanded to a change in price. PED is one of the most frequently examined concepts at A-Level and is essential for understanding how businesses set prices and how government policy (e.g., indirect taxes) affects markets. It is central to AQA Paper 1.
Key Definition: Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus.
The concept was developed by Alfred Marshall (1890), who recognised that the slope of the demand curve alone does not fully capture how sensitive consumers are to price changes.
PED = Percentage change in quantity demanded / Percentage change in price
Or equivalently:
PED = (%ΔQd) / (%ΔP)
Because of the law of demand (inverse relationship between price and quantity demanded), PED is always negative. However, by convention, we often refer to the absolute value (ignoring the negative sign) when describing whether demand is elastic or inelastic.
A coffee shop raises the price of a latte from £3.00 to £3.30. As a result, daily sales fall from 200 to 180.
Step 1: Calculate the percentage change in price. %ΔP = (3.30 - 3.00) / 3.00 × 100 = +10%
Step 2: Calculate the percentage change in quantity demanded. %ΔQd = (180 - 200) / 200 × 100 = -10%
Step 3: Apply the formula. PED = -10% / +10% = -1.0
The absolute value is 1.0, meaning demand is unit elastic in this case.
Exam Tip: Always show your working step by step. Examiners award method marks even if the final answer is incorrect. Write out the formula, substitute the values, and state whether the result indicates elastic, inelastic, or unit elastic demand.
| PED Value (absolute) | Description | Meaning | Demand Curve Shape |
|---|---|---|---|
| PED = 0 | Perfectly inelastic | Quantity demanded does not change at all when price changes | Vertical line |
| 0 < PED < 1 | Inelastic | Quantity demanded changes proportionately less than the price change | Steep curve |
| PED = 1 | Unit elastic | Quantity demanded changes proportionately the same as the price change | Rectangular hyperbola |
| PED > 1 | Elastic | Quantity demanded changes proportionately more than the price change | Flat/shallow curve |
| PED = ∞ | Perfectly elastic | Any price increase causes quantity demanded to fall to zero | Horizontal line |
Exam Tip: A common misconception is that a steeper demand curve always means more inelastic demand. This is broadly true when comparing curves on the same axes, but remember that PED is measured using percentages, not absolute changes. The exact PED depends on the point on the curve, not just the slope.
What determines whether demand for a good is elastic or inelastic? The key factors are:
This is the most important determinant. If close substitutes are readily available, consumers can easily switch when the price rises, making demand elastic. If there are few or no substitutes, consumers have little choice but to continue buying, making demand inelastic.
Demand for necessities tends to be inelastic because consumers must buy them regardless of price. Demand for luxuries tends to be elastic because consumers can easily do without them.
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