Cambridge IGCSE Economics: Price elasticity of demand and supply (0455) – Revision Notes

These revision notes condense sections 2.7 and 2.8 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. The study guide for this unit has the full explanations and longer worked examples. Check recall with the practice questions. Also useful: the Cambridge IGCSE Economics hub, the printable checklist, the broader Topic 2 revision notes and the free diagnostics. Every name and figure here is made up.

Definitions (2.7.1 and 2.8.1)

• PED: how responsive quantity demanded is when the price of the good changes.
• PES: how responsive quantity supplied is when the price of the good changes.

Formulas (2.7.2 and 2.8.2)

Item	Formula
Percentage change	(new - old) / old x 100
PED	percentage change in quantity demanded, divided by percentage change in price
PES	percentage change in quantity supplied, divided by percentage change in price
Revenue (total spending)	price x quantity

PED is normally negative (price and quantity move in opposite directions). PES is positive.

Method in steps

1. Find the percentage change in price from the starting price.
2. Find the percentage change in quantity from the starting quantity.
3. Divide quantity by price, not the other way round.
4. Compare the size with 1 and state the word: elastic, inelastic or unitary.
5. If asked about revenue, work out price x quantity before and after.

Scale of values

Value (size)	PED name	PES name
0	Perfectly inelastic	Perfectly inelastic
Between 0 and 1	Inelastic	Inelastic
Exactly 1	Unitary	Unitary
Over 1	Elastic	Elastic
Infinity	Perfectly elastic	Perfectly elastic

Diagrams in words

Elasticity	Demand curve	Supply curve
Zero	Vertical line	Vertical line
Infinite	Horizontal line	Horizontal line
Unitary	Curve bowing towards the origin (rectangular hyperbola)	Straight line through the origin
Elastic	Shallow slope	Straight line meeting the price axis
Inelastic	Steep slope	Straight line meeting the quantity axis

Draw both axes, label them price and quantity, and label each curve D or S with its elasticity.

Determinants

PED is more elastic when	PES is more elastic when
There are many close substitutes	There is spare capacity
The good is a luxury	Stocks of finished goods are held
It takes a large share of income	Factors of production are easy to switch
The period is longer	The period is longer
The good is defined narrowly (one brand)	Inputs are easy to obtain and production is quick

Revenue rules (2.7.4)

Demand	Price up	Price down
Elastic	Revenue falls	Revenue rises
Unitary	No change	No change
Inelastic	Revenue rises	Revenue falls

Worked reminder. Price 20 to 21 (+5%) and quantity 400 to 340 (-15%): PED = -3.0. Revenue goes from 8,000 to 7,140, so it falls. Elastic demand, price rise, revenue falls.

Significance (2.7.5 and 2.8.4)

User	PED	PES
Consumers	Inelastic demand means a price rise hits their budget hard, especially for necessities	With inelastic supply, a rise in demand pushes price up sharply
Producers	Choose price rises (inelastic) or price cuts (elastic) to raise revenue; build loyalty to make demand less elastic	Expand quickly if supply is elastic; hold spare capacity or stock to be able to respond
Government	Indirect tax raises more revenue on inelastic goods but cuts consumption less; weak for discouraging harmful goods	Subsidies and policies to raise output work better where supply is elastic; inelastic supply needs longer-term measures

Evaluation words. “It depends on” the size of PED, the time period, whether the tax is passed on, and what the aim is (revenue or reduced use).

Must-know distinctions

• Slope is not elasticity. A straight line has the same slope everywhere but a different PED at each point.
• Elastic means the quantity percentage is bigger. Inelastic means the price percentage is bigger.
• A tax that raises revenue (inelastic) is not the same as a tax that cuts consumption (elastic).
• A shift of a curve is not a change in elasticity.

More worked reminders

Elastic demand and a price cut. PED is -2.5. A seller cuts price by 6%, from 30 to 28.20, and sells 200 units. Quantity rises by 2.5 x 6 = 15%, to 230. Revenue goes from 30 x 200 = 6,000 to 28.20 x 230 = 6,486. Elastic demand, price cut, revenue rises.

Inelastic supply. Price rises from 12 to 15 (+25%) and quantity supplied from 160 to 176 (+10%). PES = 10 / 25 = 0.4. Supply is inelastic, so the firm cannot raise output quickly enough to take full advantage of the higher price.

Why an indirect tax depends on PED. A tax of 2 per unit raises price from 10 to 12 (+20%). Sales before the tax are 500.

• PED = -0.2: sales fall 4%, to 480, and the government collects 960.
• PED = -2.0: sales fall 40%, to 300, and the government collects 600.

The inelastic good raises more revenue. The elastic good cuts consumption more.

Chains of reasoning for longer answers

Why a firm may not raise price. Demand for its product is elastic, because buyers have close substitutes. A price rise cuts quantity by a larger percentage. Revenue falls. The firm should hold price or cut it.

Why a tax may fail to cut use of a harmful good. The good is addictive, so demand is inelastic. A tax raises price, but quantity falls by a smaller percentage. Consumption falls little. The government gains revenue but may need other policies as well.

Why prices spike after a poor harvest. The harvest shifts supply to the left. Demand for a staple food is inelastic, so quantity demanded falls by little and price must rise by a lot to clear the market. Because the crop cannot be expanded within the season (inelastic supply), the high price cannot bring extra output quickly.

Why long-run effects differ. Over time buyers find substitutes, so demand becomes more elastic. Firms add capacity, so supply becomes more elastic. A conclusion that ignores the time period is incomplete.

Quick self-test

1. Define PED in one sentence, naming both variables.
2. Price rises from 50 to 55 and quantity falls from 1,000 to 900. Calculate PED and say what type it is.
3. PED is -1.5 and price falls 4%. What is the percentage change in quantity demanded?
4. Price falls from 8 to 6 and quantity rises from 80 to 92. Calculate PED, state its type, and say whether revenue rises or falls.
5. Price rises from 20 to 22 and quantity supplied rises from 300 to 375. Calculate PES.
6. PES is 0.5 and price rises 12%. What is the percentage change in quantity supplied?
7. State the shape of a perfectly inelastic supply curve.
8. Give two determinants of PES.
9. The price of a good with PED of -0.2 is raised 20% by an indirect tax. What is the percentage change in quantity demanded, and why is the tax effective for raising revenue?
10. A firm raises price from 10 to 12 and quantity demanded falls from 500 to 460. Calculate PED and the change in revenue.

Answers

1. The responsiveness of quantity demanded to a change in price.
2. % change in price = +10%; % change in quantity = -10%; PED = -1.0, unitary. (Revenue moves from 50,000 to 49,500, a small fall, because percentages are taken from the starting values.)
3. -1.5 x -4 = +6%.
4. % change in price = -25%; % change in quantity = +15%; PED = -0.6, inelastic. Revenue: 8 x 80 = 640 and 6 x 92 = 552, so revenue falls by 88.
5. % change in price = +10%; % change in quantity = +25%; PES = 2.5 (elastic).
6. 0.5 x 12 = +6%.
7. A vertical line.
8. Any two of: spare capacity, stocks, time period, ease of switching factors, availability of raw materials, length of production process.
9. -0.2 x 20 = -4%. Quantity falls by less than price rises, so revenue rises (demand is inelastic).
10. The price rise is +20%. The quantity change is -8%. PED = -0.4, inelastic. Revenue rises from 5,000 to 5,520, an increase of 520.

Where marks are usually lost

• Dividing price by quantity.
• Calculating a percentage from the new value instead of the old one.
• Leaving out the word that answers the question (elastic, inelastic, unitary) after a figure.
• Calling a PED of -0.6 elastic because it is negative or looks large. Compare the size with 1.
• Writing the revenue rule the wrong way round.
• Giving a determinant with no link to the good in the question.
• Describing the significance of PED for the government without naming the policy (for example an indirect tax).
• Drawing a demand curve with no axis labels, or a straight line described as having one PED throughout.
• Mixing up PED and PES determinants.
• Forgetting that a good can be elastic over a long period and inelastic over a short one, so the time period should be named.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 2.7 Price elasticity of demand (PED) and 2.8 Price elasticity of supply (PES).