IB DP Economics: Elasticity of demand – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

This set follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 2.5, Elasticity of demand: PED and YED are SL and HL, and questions labelled HL only are for Higher Level. All firms, towns and countries are fictional and every figure is invented. The bracketed mark points are a revision aid, not IB marking.

Study first with the study guide or the revision notes. Course links: IB DP Economics hub, checklist and free diagnostics. Give PED with its sign unless a question says otherwise.

Questions

1. Define price elasticity of demand. [2]

2. (calculator-free) The price of a good rises from 50 to 55 and the quantity demanded falls from 800 to 720. Calculate PED and state what type of elasticity it shows. [3]

3. (calculator allowed) Pellam Tea sells a blend at 5.00 a packet and sells 2,400 packets a week. Its PED is -0.5. The firm raises the price by 8%.

(a) Calculate the new weekly quantity. [2] (b) Calculate the change in total revenue. [2]

4. A fictional gym cuts its membership fee. The fee falls from 20 to 16 a month and monthly members rise from 100 to 150.

(a) Calculate PED. [3] (b) Draw a diagram showing the change in total revenue, with the figures labelled. [2]

5. Explain how each factor affects PED for the good named.

(a) The number of close substitutes: a brand of breakfast cereal. [2] (b) The proportion of income spent: table salt. [2] (c) Time: petrol, after a permanent price rise. [2]

6. (HL only) The demand for a good in a fictional market is Q = 240 - 6P.

(a) Calculate PED when price rises from 10 to 12. [2] (b) Calculate PED when price rises from 30 to 32. [2] (c) Comment on the two results. [1]

7. (calculator-free) In a fictional country, household income rises from 3,000 to 3,300 a month. Weekend city breaks purchased rise from 120 to 162.

(a) Calculate YED. [3] (b) Classify the good. [1]

8. Good R has a YED of -0.5. Incomes rise from 4,000 to 4,400 and the original quantity demanded is 200.

(a) Calculate the new quantity demanded. [2] (b) Draw the Engel curve through the two points. [3]

9. (HL only) In the fictional economy of Karvia, YED is 0.3 for agricultural goods, 1.1 for manufactures and 1.6 for services. Income rises by 5%.

(a) Calculate the percentage change in demand for each. [3] (b) Explain what these results imply for the sectoral structure of Karvia. [3]

10. Doverly Loaves, a fictional bakery chain, faces price elastic demand for its rolls. Discuss whether it should cut its price to raise revenue. [8]

11. (calculator allowed) Halvor Ferries, a fictional operator, records fares and weekly passengers: fare 30 with 1,000 passengers; fare 36 with 880; fare 42 with 800.

(a) Calculate PED between fares 30 and 36. [2] (b) Calculate PED between fares 36 and 42. [2] (c) Calculate total revenue at each fare. [1] (d) Recommend a fare, with one reason for caution. [2]

Answers

1. PED measures how responsive the quantity demanded is to a change in the good’s own price [1]. It is the quantity response in per cent divided by the price change in per cent [1]. [2] Examiner insight: Give the idea of responsiveness and the formula together; either alone leaves the definition incomplete.

2. Price change = 5 / 50 = +10% [1]. Quantity change = -80 / 800 = -10% [1]. PED = -10 / 10 = -1.0, so demand is unitary elastic (size 1) [1]. [3] Examiner insight: Without a calculator, choose the starting values for each percentage and show each fraction; a bare answer gives no evidence of method.

3. (a) Quantity change = -0.5 x 8 = -4% [1]. New quantity = 2,400 x 0.96 = 2,304 packets [1]. [2] (b) New price = 5.00 x 1.08 = 5.40, so revenue is 5.40 x 2,304 = 12,441.60 against 12,000 before [1]. Revenue rises by 441.60 [1]. [2] Examiner insight: Calculate old and new revenue separately and state the change; this avoids relying on the rule alone.

4. (a) Price change = -4 / 20 = -20% [1]. Quantity change = +50 / 100 = +50% [1]. PED = 50 / -20 = -2.5 (price elastic) [1]. [3] (b) Axes: price (vertical), quantity (horizontal). Revenue rectangle before: 20 x 100 = 2,000 [1]. Rectangle after: 16 x 150 = 2,400, so the larger rectangle shows revenue rising by 400 [1]. [2] Examiner insight: A revenue diagram needs both rectangles labelled with price and quantity, plus a clear statement of which is larger.

5. (a) A brand of cereal usually has many close rivals, so consumers can switch easily [1]. Demand is therefore relatively elastic [1]. [2] (b) Salt is a very small share of income, so a price rise is barely noticed [1]. Demand is therefore relatively inelastic [1]. [2] (c) In the short run drivers cannot change vehicles or journeys, so demand is inelastic [1]. Over time they can switch to efficient cars or other transport, so demand becomes more elastic [1]. [2] Examiner insight: Link each determinant to the named good and give the direction of the effect; a list of determinants without application is thin.

6. (a) At P = 10, Q = 180; at P = 12, Q = 168. Price +20%, quantity -6.67% [1]. PED = -0.33 [1]. [2] (b) At P = 30, Q = 60; at P = 32, Q = 48. Price +6.67%, quantity -20% [1]. PED = -3.0 [1]. [2] (c) The slope is the same, but PED size is below 1 at the lower price and above 1 at the higher price, so PED changes along a straight demand curve [1]. [1] Examiner insight: Show the starting price and quantity for each range, because the result depends on where on the line you begin.

7. (a) Income change = 300 / 3,000 = +10% [1]. Quantity change = 42 / 120 = +35% [1]. YED = 35 / 10 = +3.5 [1]. [3] (b) YED is positive and above 1: a normal good with income elastic demand, typical of a luxury or service [1]. [1] Examiner insight: Naming the sign and the size in your classification shows you understand both what the number means and why.

8. (a) Income change = 400 / 4,000 = +10% [1]. Quantity change = -0.5 x 10 = -5%, so new quantity = 190 [1]. [2] (b) Income up the side, quantity along the base, both axes labelled [1]. Plot (200, 4,000) and (190, 4,400) [1]. Draw the curve sloping backwards, because quantity falls as income rises (an inferior good) [1]. [3] Examiner insight: Label both axes with income and quantity, because an Engel curve with unlabelled or reversed axes is easy to misread.

9. (a) Agriculture 0.3 x 5 = +1.5% [1]. Manufactures 1.1 x 5 = +5.5% [1]. Services 1.6 x 5 = +8.0% [1]. [3] (b) Demand for agriculture grows more slowly than income [1]. Demand for services grows faster than income [1]. Over time the share of services in output rises and the share of agriculture falls, which changes the sectoral structure [1]. [3] Examiner insight: Move from the numbers to the economy-wide consequence; stopping at the calculations leaves the explanation unmade.

10. Indicative points, each worth [1]: Elastic demand means the percentage rise in quantity exceeds the percentage fall in price [1]. A price cut then raises revenue because the extra sales outweigh the lower price on existing sales [1]. Example: price 2.00 to 1.80 (-10%), quantity 1,000 to 1,200 (+20%), PED = -2.0, revenue 2,000 to 2,160 [1]. Demand is probably elastic because rolls have many close substitutes [1]. Against: revenue is not profit, and extra output has extra costs [1]. PED is an estimate for a particular range and may not hold for a larger cut [1]. Rivals may match the cut, removing the gain, or capacity limits may restrict output [1]. A judgement based on the objective and costs, such as yes if profit rises and no if costs rise faster [1]. [8] Examiner insight: Discuss requires a balanced review, so give arguments on both sides and finish with a reasoned conclusion.

11. (a) Price +20%, passengers -12% [1]. PED = -0.6 [1]. [2] (b) Price +16.67%, passengers -9.09% [1]. PED = -0.55 [1]. [2] (c) 30 x 1,000 = 30,000; 36 x 880 = 31,680; 42 x 800 = 33,600 [1]. [1] (d) Demand is inelastic over both ranges, so revenue rises as fares rise; recommend fare 42 [1]. Caution: PED is estimated for these ranges only and may become elastic at higher fares, or costs and rival ferries may change the result [1]. [2] Examiner insight: A recommendation should rest on the calculated PED and name a limitation of the data.

Where marks are usually lost

• Taking each percentage change from the end figure instead of the start.
• Inverting the PED formula by putting price change over quantity change.
• Quoting a size such as 0.6 and then calling demand elastic.
• Naming a determinant but never tying it to the named good.
• Drawing revenue rectangles without labelled axes or labelled figures.
• Saying revenue falls after a price rise without stating that demand is elastic.
• Describing PED as constant along a straight line, when the HL guide content shows it changes.
• Treating revenue as profit in a discussion.
• Answering “classify” with only “normal” and no mention of the size of YED.

Next steps

• Review the revision notes and the study guide.
• Return to the IB DP Economics hub and tick the checklist.
• Find weak areas with the free diagnostics.
• Book a free trial class on the trial page.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published February 2020, International Baccalaureate Organization. Sub-topic 2.5 Elasticity of demand, within Unit 2: Microeconomics.