Cambridge O Level Economics: Price elasticity of demand: calculation, determinants and revenue (2281) – Revision Notes

These notes condense section 2.7 (price elasticity of demand, PED) of the Cambridge O Level Economics 2281 syllabus for examination in 2026. The course is not tiered. For full explanations, read the study guide, then test yourself with the practice questions. The Cambridge O Level Economics hub, the printable checklist and the free diagnostics help you plan. All names and figures here are invented for practice.

2.7.1 Definition

Price elasticity of demand (PED) is a measure of how far the amount buyers want to purchase reacts when the good’s price changes.

• Elastic: quantity changes by a larger percentage than price.
• Inelastic: quantity changes by a smaller percentage than price.

2.7.2 Formula and interpretation

Item	Rule
PED	% change in quantity demanded / % change in price
% change	(new - old) / old x 100
Sign	Normally negative, because price and quantity move in opposite directions
Reading	Judge the size, ignoring the sign, and say which sign you used

Size of PED	Name	Demand curve
0	Perfectly inelastic	Vertical
0 to 1	Inelastic	Steep
1	Unitary	Curve bowing in towards the origin
Above 1	Elastic	Shallow
Infinite	Perfectly elastic	Horizontal

Method in steps

1. Work out the % change in price.
2. Work out the % change in quantity.
3. Divide quantity by price. Keep the sign.
4. Compare the size with 1 and say what it means.

Reminder 1. Price 10 to 12, quantity 80 to 68. Price: +20%. Quantity: (68 - 80) / 80 = -15%. PED = -15 / 20 = -0.75. Inelastic.

Reminder 2. Price 50 to 40, quantity 200 to 300. Price: -20%. Quantity: +50%. PED = 50 / -20 = -2.5. Elastic.

Using PED forwards. % change in quantity = PED x % change in price. With PED -0.5, a 20% rise in price lowers quantity by 10%. From 400 units that is 400 x 0.90 = 360.

Diagram points

• Axes: price vertical, quantity horizontal. Label the curve D.
• Two curves drawn on the same scales: the shallower one is the more elastic.
• A straight sloping curve has a different PED at each point: elastic near the top, inelastic near the bottom.
• Large price changes can give different answers depending on the base used. Use the old value, and check with revenue.

2.7.3 Determinants of PED

Influence	More elastic when	More inelastic when
Substitutes	Many close substitutes	Few or no close substitutes
Necessity or luxury	A luxury, easily postponed	A necessity
Share of income	A large part of the budget	A tiny part of the budget
Time	Long run, buyers adjust	Short run, buyers locked in
Width of definition	One brand or variety	The whole product group

Always attach the factor to the named good, then say what it means for the response of buyers.

2.7.4 PED and total revenue

Total spending by buyers equals total revenue of sellers: price x quantity.

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

Memory line. Elastic: revenue moves opposite to price. Inelastic: revenue moves with price.

Diagram. Revenue is the rectangle under the demand curve at the chosen price and quantity. After a price cut, the rectangle gains a strip at the right (extra units) and loses a strip at the top (lower price on old units). The bigger strip decides the result.

Reminder 3 (elastic). Price 40 to 36, quantity 300 to 360. PED = +20 / -10 = -2.0. Revenue: 12,000 to 12,960, a rise of 960.

Reminder 4 (inelastic). Price 40 to 44, quantity 300 to 291. PED = -3 / +10 = -0.3. Revenue: 12,000 to 12,804, a rise of 804.

Reminder 5 (a schedule). A market (invented) has these prices and quantities, with revenue worked out as price x quantity.

Price	Quantity	Revenue	PED for the price cut to the next row
30	40	1,200	-2.4 (elastic), revenue rises to 1,400
25	56	1,400	-0.89 (inelastic), revenue falls to 1,320
20	66	1,320	-0.36 (inelastic), revenue falls to 1,080
15	72	1,080

First step: (25 - 30) / 30 = -16.7% and (56 - 40) / 40 = +40%, so PED = 40 / -16.7 = -2.4. Revenue is highest at a price of 25, after which cuts no longer pay.

Reading the rectangle. At a price of 25 the rectangle is 25 high and 56 wide, so it has an area of 1,400. At a price of 30 it is 30 high and 40 wide, with an area of 1,200. The wider rectangle wins because demand between those prices is elastic.

2.7.5 Significance of PED

Decision maker	Implication
Consumers	Inelastic demand: a price rise costs more in total and leaves them little room to switch. Elastic demand: they can switch, which limits sellers’ power
Producers	Inelastic: a price rise lifts revenue. Elastic: a price cut lifts revenue. Firms try to make demand less elastic, for example with brand loyalty. Revenue is not profit: compare with costs too
Government	Taxing a good with inelastic demand raises more revenue but reduces consumption less. Elastic demand: a tax cuts consumption more but raises less revenue. Also useful when judging effects of subsidies and price changes on spending

Chains of reasoning to practise

Write each point as a chain, one link per clause.

• Producer: demand for the good is inelastic, because buyers have few substitutes, so a price rise causes a smaller percentage fall in quantity, so total revenue rises. This makes a rise attractive, but costs and the longer run, when buyers find alternatives, may weaken the case.
• Government: demand is inelastic, so a tax raises the price but quantity falls only slightly, so the government collects a lot of revenue. The same fact means the tax does little to cut use of a harmful good, so other policies may be needed.
• Consumer: demand is inelastic because the good is a necessity, so after a price rise buyers keep buying and spend more in total, which leaves less of their income for other goods.

For an evaluation question, finish with a judgement: say which effect matters more in the case given, and why, mentioning the time period.

Must-know distinctions

• Elastic versus inelastic: this is about the size of the response, not the importance of the good.
• Steep versus flat: compare curves on the same scales.
• PED versus slope: slope depends on the units on the axes, PED depends on percentages.
• Revenue versus profit: revenue ignores costs.
• Short run versus long run: demand usually becomes more elastic over time.

Quick self-test

1. Define price elasticity of demand.
2. Price rises from 10 to 12 and quantity demanded falls from 80 to 68. Calculate PED.
3. Price falls from 50 to 40 and quantity demanded rises from 200 to 300. Calculate PED.
4. PED is -2. Price falls by 6%. What is the percentage change in quantity demanded?
5. PED is -0.5. Price rises by 20%. Quantity was 400. What is the new quantity?
6. What is the PED of a vertical demand curve? Of a horizontal one?
7. Price falls from 40 to 36 and quantity rises from 300 to 360. Calculate PED and the change in revenue.
8. Price rises from 40 to 44 and quantity falls from 300 to 291. Calculate PED and the change in revenue.
9. A seller raises price and total revenue falls. What does this show about PED?
10. Give two reasons why demand for table salt is inelastic.
11. Why might a government tax a good with inelastic demand?

Answers

1. A measure of how far quantity demanded reacts to a price change.
2. +20% price, -15% quantity, PED = -0.75 (inelastic).
3. -20% price, +50% quantity, PED = -2.5 (elastic).
4. -2 x -6 = +12%.
5. -0.5 x 20 = -10%; 400 x 0.90 = 360 units.
6. 0; infinite.
7. -10% price, +20% quantity, PED = -2.0; revenue rises from 12,000 to 12,960, a rise of 960.
8. +10% price, -3% quantity, PED = -0.3; revenue rises from 12,000 to 12,804, a rise of 804.
9. Demand is elastic: quantity fell by a larger percentage than price rose.
10. It has no close substitutes, and it takes a very small part of income, so a price rise has little effect on how much is bought.
11. Buyers cut back little, so the tax raises substantial revenue.

Where marks are usually lost

• Writing the formula upside down, with price on top.
• Starting a percentage change from the final figure instead of the original one.
• Leaving the answer as a bare number with no statement of elastic or inelastic.
• Saying “elastic” for a PED of -0.5 because the figure is negative.
• Describing a determinant in general terms without applying it to the good in the question.
• Drawing curves without labelling axes, or comparing curves drawn on different scales.
• Stating the revenue rule but not showing it with the numbers given.
• Treating revenue as profit when asked about a firm’s decision.
• Giving one-sided answers on government taxes: say what happens to revenue and what happens to consumption.

Official syllabus

These notes follow section 2.7 of the Cambridge O Level Economics 2281 syllabus for examination in 2026, published by Cambridge Assessment International Education.