A level-readyEconomics · WEC11 (Unit 1)
Price elasticity of demand
Price elasticity of demand (PED) measures how strongly quantity demanded responds to a change in price.
The formula
PED = % change in quantity demanded / % change in price. It is normally negative, because demand curves slope down; economists often discuss its size.
Interpreting it
- |PED| > 1: price elastic (quantity changes by a bigger percentage)
- |PED| < 1: price inelastic
- |PED| = 1: unitary elastic
Determinants include the number of close substitutes, the share of income spent, whether it is a necessity or habit-forming, and the time period.
Revenue
If demand is price elastic, a price cut raises total revenue. If demand is price inelastic, a price rise raises total revenue.
Worked example
Price rises by 10% and quantity demanded falls by 5%. Find PED.
- PED = -5% / 10%
Answer: PED = -0.5 (price inelastic)
Check yourself
- Price falls 20% and quantity demanded rises 30%. Find PED.
Show answer
-1.5. PED = 30 / -20 = -1.5.
- PED = -0.3. Demand is
- price elastic
- price inelastic
- unitary elastic
- perfectly elastic
Show answer
price inelastic. |PED| < 1 means inelastic.
- Demand is price inelastic. To increase total revenue the firm should
- cut its price
- keep price fixed and raise output
- advertise less
- raise its price
Show answer
raise its price. Quantity falls by a smaller percentage than the price rises.
- Which product is likely to have the most price elastic demand?
- One brand of bottled water
- Petrol
- Tap water
- Prescription medicine
Show answer
One brand of bottled water. A single brand has many close substitutes.
- Demand usually becomes more price elastic
- in the very short run
- when a good becomes a necessity
- over a longer time period
- when there are fewer substitutes
Show answer
over a longer time period. Over time consumers find substitutes and change habits.
Sources
Last updated 7 November 2026. Spotted a mistake? Email alevel@lifereadysociety.com.