Price elasticity of demand: calculation, values and determinants

The three elasticities of demand

An elasticity measures how responsive one variable is to a change in another.

• Price elasticity of demand (PED) = % change in quantity demanded / % change in price
• Income elasticity of demand (YED) = % change in quantity demanded / % change in real income
• Cross elasticity of demand (XED) for good A with respect to good B = % change in quantity demanded of A / % change in price of B

% change = (new - original) / original x 100. Always use the original value as the base, as Pearson mark schemes do. Elasticities have no units.

Interpreting PED values

PED is negative for normal demand curves (price and quantity move in opposite directions), so economists compare its size, ignoring the minus sign:

• Perfectly inelastic (PED = 0): quantity does not change at all. Diagram: a vertical demand curve.
• Inelastic (between 0 and -1): quantity changes by a smaller percentage than price. Diagram: a steep curve.
• Unitary elastic (PED = -1): quantity changes by the same percentage. Diagram: a rectangular hyperbola, a curve along which total revenue is the same at every price.
• Elastic (more negative than -1): quantity changes by a larger percentage. Diagram: a shallow curve.
• Perfectly elastic (PED = infinity): any price rise makes quantity demanded fall to zero. Diagram: a horizontal demand curve.

Careful: slope is not the same as elasticity. Comparing steepness only works for two curves through the same point, and elasticity changes along a straight line (next lesson).

Factors that influence PED

The specification names five:

• Availability of substitutes: more close substitutes make demand more elastic. A single brand of cola is elastic; drinks in general are inelastic.
• Branding: strong brand loyalty makes consumers less willing to switch, so demand is more inelastic. This is a reason firms advertise.
• Percentage of income spent: goods taking a small share of income (salt, matches) are inelastic; big purchases (cars, holidays) are more elastic.
• Addictive or habitual consumption: cigarettes, alcohol, coffee are inelastic.
• Durability: purchases of durable goods (washing machines, cars) can be postponed when price rises, making demand more elastic; non-durables used up quickly are more inelastic.

Time also matters: demand is usually more elastic in the long run as consumers find substitutes.

Exam technique: calculation questions

Pearson's 4-mark calculation questions typically give 1 knowledge mark for the formula and 3 application marks for working and the answer; a correct final answer with working earns full marks. Write the formula, calculate each percentage change separately, then divide. Give the sign and say what the value means ('-0.5, so demand is price inelastic').

Worked example

The price of a sandwich rises from $2.50 to $3.00 and daily sales fall from 400 to 360. Calculate the PED and interpret it.

1. % change in quantity = (360 - 400) / 400 x 100 = -10%.
2. % change in price = (3.00 - 2.50) / 2.50 x 100 = 20%.
3. PED = -10 / 20 = -0.5.

Answer: PED = -0.5: price inelastic, since quantity changed by a smaller percentage than price.

Check yourself

1. The price of a concert ticket falls from $40 to $36 and ticket sales rise from 1,000 to 1,250. Calculate the price elasticity of demand.
   Show answer

   -2.50. %ΔQ = 25%; %ΔP = -10%; PED = 25 / -10 = -2.5. Demand is price elastic.

2. PED for a good is -0.4. Its price rises by 15%. By what percentage does quantity demanded change? (Give a negative number for a fall.)
   Show answer

   -6 %. %ΔQ = PED x %ΔP = -0.4 x 15 = -6%.

3. A demand curve drawn as a vertical line has a PED of
   • infinity (perfectly elastic)
   • zero (perfectly inelastic)
   • minus one (unitary)
   • minus two (elastic)
   Show answer

   zero (perfectly inelastic). Quantity demanded is the same whatever the price.

4. Successful brand advertising is most likely to make demand for a product
   • more price elastic
   • perfectly elastic
   • more price inelastic
   • unitary elastic
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   more price inelastic. Loyal customers are less willing to switch when price rises.

5. Why is demand for new washing machines likely to be more price elastic than demand for washing powder?
   • Buying a durable good can be postponed when its price rises
   • Washing machines have no substitutes
   • Washing powder takes a large share of income
   • Washing machines are addictive
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   Buying a durable good can be postponed when its price rises. Households can keep their old machine for longer if prices rise.

6. If PED is -1, a 10% rise in price causes quantity demanded to
   • fall by 1%
   • rise by 10%
   • fall by 10%
   • stay the same
   Show answer

   fall by 10%. Unitary elasticity: equal percentage changes in opposite directions.

7. Explain why demand for cigarettes is likely to be price inelastic.
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   Cigarettes are addictive (habit forming), so smokers continue to buy them when the price rises, and there are few close substitutes. Quantity demanded falls by a smaller percentage than the price rises.. Give a determinant and explain its effect on the size of the quantity response.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.