Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Price elasticity of demand (PED) measures how strongly quantity demanded responds to a change in the good’s own price, in percentage terms.
- PED is negative (law of demand); quote and compare its magnitude, |PED|.
- Elastic |PED| > 1; inelastic |PED| < 1; unit elastic |PED| = 1. Each label applies to a price range.
- Perfectly inelastic (|PED| = 0): vertical demand curve. Perfectly elastic (|PED| infinite): horizontal demand curve.
- Slope is not elasticity. A straight-line demand curve is elastic above its midpoint, unit elastic at it and inelastic below it.
Key relationships
| Relationship | How to use it |
|---|---|
| PED = % change in Q ÷ % change in P | Percentages, never raw changes |
| % change (midpoint) = change ÷ average of the two values × 100 | Same answer whether price rises or falls |
| % change in Q = |PED| × % change in P | Predict a response from a known elasticity |
| TR = P × Q | Also buyers’ total expenditure |
| Demand | Price rises | Price falls |
|---|---|---|
| Elastic | TR falls | TR rises |
| Inelastic | TR rises | TR falls |
| Unit elastic | TR unchanged | TR unchanged |
What makes demand more elastic
- Many close substitutes (the main factor).
- A luxury rather than a necessity.
- A large share of the buyer’s income.
- More time for buyers to adjust.
- A narrowly defined market (one brand, not the whole product).
Assumptions behind the model
- Only the good’s own price changes; income, tastes and other prices stay the same, so we move along one demand curve.
- The elasticity found is for the range measured, not for the whole curve.
Mistakes to avoid
- Dividing the change in quantity by the change in price instead of the percentage changes.
- Calling a steep curve “inelastic” without checking where on the curve you are.
- Saying inelastic means quantity does not change at all (that is perfectly inelastic).
- Getting the total revenue test backwards: elastic means price and TR move in opposite directions.
- Comparing signed values: −2 is more elastic than −0.5.
- Mixing up the formula and calculating % change in price ÷ % change in quantity.
Quick self-check
- Price falls from $9 to $7 and quantity rises from 30 to 50. Find |PED| with the midpoint method. (Q: 20 ÷ 40 = 50%; P: 2 ÷ 8 = 25%; |PED| = 2, elastic)
- A café raises its prices and its total revenue rises. Was demand elastic or inelastic? (Inelastic: price and TR moved in the same direction.)
- Why can a straight-line demand curve be both elastic and inelastic? (The same raw change is a different percentage at different prices and quantities.)
Next: practice questions.