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

This guide teaches sections 2.7 (price elasticity of demand, PED) and 2.8 (price elasticity of supply, PES) of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. There is no separate tier for this subject, so every candidate studies the same content. The firms, markets, countries and figures below are fictional, and none of them is a real statistic.

More on this unit: the revision notes, the practice questions, the wider Topic 2 study guide, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Outcomes this guide teaches

Section	Outcome
2.7.1	Define PED
2.7.2	Calculate PED by formula, interpret the result, draw and read demand curves of different PED
2.7.3	Explain the determinants of PED
2.7.4	Relate PED to total spending on a product (revenue), in a diagram and a calculation
2.7.5	Explain what PED means for consumers, producers and government
2.8.1	Define PES
2.8.2	Calculate PES by formula, interpret the result, draw and read supply curves of different PES
2.8.3	Explain the determinants of PES
2.8.4	Explain what PES means for consumers, producers and government

2.7.1 What PED measures

Price elasticity of demand is the responsiveness of quantity demanded to a change in price. A large response means demand is elastic. A small response means demand is inelastic.

The key word is responsiveness. PED is not how much people want the good.

2.7.2 Calculating and interpreting PED

PED = % change in quantity demanded / % change in price

% change = (new value - old value) / old value x 100

A demand curve slopes downward, so price and quantity move in opposite directions and PED comes out negative. Answers often quote the figure without the minus sign and judge its size.

Worked example 1 (inelastic). A small pizzeria (invented) raises the price of a pizza from 2.00 to 2.40. Weekly sales fall from 500 to 440 pizzas.

• % change in price = (2.40 - 2.00) / 2.00 x 100 = +20%
• % change in quantity = (440 - 500) / 500 x 100 = -12%
• PED = -12 / +20 = -0.6

The size is below 1, so demand is price inelastic: quantity fell by a smaller percentage than price rose.

Worked example 2 (elastic). A juice stall (invented) cuts the price of a smoothie from 4 to 3. Sales rise from 200 to 290 a day.

• % change in price = (3 - 4) / 4 x 100 = -25%
• % change in quantity = (290 - 200) / 200 x 100 = +45%
• PED = +45 / -25 = -1.8

The size is above 1, so demand is price elastic.

Reading the value

PED (ignoring sign)	Name	Meaning
0	Perfectly inelastic	Buyers take the same quantity whatever the price
Between 0 and 1	Inelastic	The quantity percentage is smaller than the price percentage
Exactly 1	Unitary	Quantity and price move by equal percentages
Between 1 and infinity	Elastic	The quantity percentage is larger than the price percentage
Infinity	Perfectly elastic	A tiny price rise removes all demand

Using PED backwards. If PED is -0.5 and a shop raises price by 8%, quantity demanded changes by -0.5 x 8 = -4%. From 2,000 units a week that is 2,000 x 0.96 = 1,920 units.

Diagrams (price on the vertical axis, quantity on the horizontal axis)

Perfectly inelastic   Perfectly elastic   Unitary elastic
P |      |            P |                  P | \
  |      |              |__________          |  \_
  |      |              |                    |     ‾‾--__
  +------ Q             +------------ Q      +----------- Q
 vertical line          horizontal line     curve bowing in
 (PED = 0)              (PED = infinity)    towards the origin

• A vertical demand curve means PED is 0.
• A horizontal demand curve means PED is infinite.
• A steep curve shows inelastic demand and a shallow curve shows elastic demand, when both are drawn on the same scales.
• A curve that bows in towards the origin (a rectangular hyperbola) shows unitary elasticity at every point.

A straight downward-sloping demand curve does not have one PED. Near the top (high price, low quantity) a given change in price is a small percentage and a given change in quantity is a large percentage, so demand is elastic there. Near the bottom it is inelastic.

2.7.3 Determinants of PED

1. Availability and closeness of substitutes. If a buyer can switch easily, a price rise sends them elsewhere, so demand is elastic. A good with few substitutes has inelastic demand.
2. Necessity or luxury. People keep buying necessities when price rises. They cut back on luxuries.
3. Proportion of income spent. If the good takes a small share of income, a price rise barely matters and demand is inelastic. A large item makes buyers more sensitive.
4. Time. Over a longer period buyers find substitutes and change habits, so demand is more elastic in the long run.
5. How broadly the good is defined. Demand for fuel is less elastic than demand for one brand of fuel, because rival brands are substitutes only for the brand.
6. Habit or addiction. Buyers who feel they must have the product respond little to price.

Link each determinant to the good: with no close substitutes for a medicine, buyers cannot switch, so demand is inelastic.

2.7.4 PED and total spending (revenue)

Total spending by buyers equals the revenue of sellers: price x quantity. Whether revenue rises or falls after a price change depends on PED.

PED	Price rises	Price falls
Inelastic	Revenue rises	Revenue falls
Unitary	No change	No change
Elastic	Revenue falls	Revenue rises

The reason: on elastic demand the percentage change in quantity beats the percentage change in price, so revenue moves with quantity. On inelastic demand, price wins.

Worked example 3. A demand schedule for a product in Market K (invented) follows the pattern quantity = 120 - 10 x price.

Price	Quantity	Revenue
10	20	200
8	40	320
6	60	360
4	80	320
2	100	200

Price falls from 10 to 8: % change in price = -20%, % change in quantity = +100%, so PED = -5 (elastic) and revenue rises from 200 to 320. Price falls from 8 to 6: PED = +50 / -25 = -2 (elastic) and revenue rises to 360. Price falls from 4 to 2: % change in price = -50%, % change in quantity = +25%, so PED = -0.5 (inelastic) and revenue falls from 320 to 200.

Revenue is greatest at a price of 6, where demand is about unitary. Cutting price below 6 lowers revenue.

In a diagram, revenue is the rectangle under the demand curve: height equals the price and width equals the quantity. After a price cut on elastic demand, the new rectangle is larger. After a price cut on inelastic demand, the new rectangle is smaller.

2.7.5 Why PED matters

Consumers. If demand is inelastic, a price rise leaves buyers paying more in total for almost the same amount, so spending on necessities takes a larger share of their budget. If demand is elastic, buyers can protect themselves by switching, and competition between sellers helps them.

Producers. Firms use PED to set prices and forecast revenue.

• Inelastic demand: raising price increases revenue, and costs may fall because less is sold.
• Elastic demand: cutting price (or running a sale) increases revenue. Raising price loses revenue.
• Firms try to make demand less elastic, for example by building brand loyalty.

Government. Governments use PED when they set indirect taxes.

Worked example 4. Country A (invented) imposes a tax on a good, and the price rises from 5.00 to 5.50 (+10%). The tax is 0.50 per unit and sales before the tax are 8,000.

• If PED = -0.3: quantity falls 3%, to 7,760. Tax revenue = 7,760 x 0.50 = 3,880.
• If PED = -2.0: quantity falls 20%, to 6,400. Tax revenue = 6,400 x 0.50 = 3,200.

A tax raises more revenue on inelastic demand, but it also cuts consumption less. If the aim is to discourage a harmful product, inelastic demand makes the tax a weak tool, and the government may need other measures too, such as information campaigns or regulation.

2.8.1 What PES measures

Price elasticity of supply is the responsiveness of quantity supplied to a change in price. Supply curves slope upward, so PES is positive.

2.8.2 Calculating and interpreting PES

PES = % change in quantity supplied / % change in price

Worked example 5 (inelastic). A tomato farm (invented) sees price rise from 1.50 to 1.80 a kilo (+20%). Output offered rises from 4,000 to 4,600 kilos (+15%). PES = 15 / 20 = 0.75, so supply is inelastic.

Worked example 6 (elastic). A pottery workshop (invented) sees price rise from 200 to 220 (+10%). It raises output from 50 to 65 vases a month (+30%). PES = 30 / 10 = 3.0, so supply is elastic.

Using PES backwards. If PES = 0.4 and price rises 25%, quantity supplied rises 0.4 x 25 = 10%. From 600 units that is 660.

Diagrams

Perfectly inelastic   Perfectly elastic   Unitary
P |      |            P |                  P |        /
  |      |              |__________          |      /
  |      |              |                    |    /
  +------ Q             +------------ Q      +/---------- Q
 vertical (PES = 0)     horizontal          straight line through
                        (PES = infinity)    the origin (PES = 1)

• A vertical supply curve means PES is 0 (a fixed stock).
• A horizontal supply curve means PES is infinite.
• A straight supply curve that starts on the price axis is elastic. One that starts on the quantity axis is inelastic. One through the origin has PES of 1 everywhere.

2.8.3 Determinants of PES

1. Spare capacity. A firm with idle machines and workers can raise output at once.
2. Stocks of finished goods. A firm holding stock can release it when price rises. A good that cannot be stored (fresh fruit) has low PES.
3. Time. Supply is more elastic in the long run, because firms can build capacity, hire and train.
4. Ease of switching factors of production. Mobile inputs (workers with general skills, flexible machinery) let a firm move into the more profitable good.
5. Supply of raw materials. If inputs are in short supply or take a long time to grow, supply is inelastic.
6. Length of the production process. Crops that take a season to grow cannot respond within it.

2.8.4 Why PES matters

Worked example 7. Demand in two markets (invented) starts at the pattern quantity = 200 - 10 x price, so the starting price in each is 10 and quantity 100. Demand then rises to quantity = 230 - 10 x price. In Market X supply is inelastic (quantity = 100 + 2 x (price - 10)). In Market Y supply is elastic (quantity = 100 + 20 x (price - 10)).

	New price	New quantity	% change price	% change quantity	PES
Market X	12.5	105	+25%	+5%	0.2
Market Y	11.0	120	+10%	+20%	2.0

The same rise in demand gives a large price rise and small quantity rise in X, and the reverse in Y.

Consumers. Where supply is inelastic, a rise in demand pushes prices up sharply for little extra output. Where supply is elastic, prices stay steadier.

Producers. Firms with elastic supply can take advantage of a price rise by expanding output quickly. Those with inelastic supply cannot, and their rivals may win the extra sales. Producers use PES when planning spare capacity and stock.

Government. Governments need PES when they want more output. A subsidy to a sector with inelastic supply raises output only slightly and lowers price only slightly, so much of the money may simply raise producers’ profit. A government that wants to ease a shortage of a good with inelastic supply, such as housing, may need measures that increase supply over time, because a short-run price signal will not work quickly.

Common errors

• Putting the formula upside down (price over quantity).
• Using the new value as the base for a percentage: use the starting value.
• Saying a steep demand curve means demand is “strong”. It means inelastic.
• Saying revenue falls when price rises without checking whether demand is elastic or inelastic.
• Writing “elastic” when the figure is exactly 1: that is unitary.
• Using a PES determinant in a PED answer, or the reverse.
• Describing the significance of PED without saying who is affected, how and why.

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).