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Detailed notes on The allocation of resources for Cambridge IGCSE Economics, covering key concepts, explanations, examples, and exam-focused revision points.
PED measures how RESPONSIVE quantity demanded is to a change in price. The most-tested formula on the course. Master the calculation, the categories, the determinants, and the revenue rule.
Mapped to the Cambridge IGCSE 0455 syllabus (2027-2029).
%ΔQ on top, %ΔP on bottom. Show every step.
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price.
PED=% change in price% change in quantity demanded
Three steps to calculate:
Worked example. Price rises from 10to12. Quantity demanded falls from 100 to 90.
The negative sign. PED is almost always negative because price and quantity move in opposite directions (law of demand). Mark schemes typically accept the absolute value |PED| for categorisation, but show the negative in your calculation and switch to |PED| when classifying.
A common shortcut. If you only need to know the category (elastic vs inelastic), you can compare the percentages without dividing:
Cambridge tip. Mark schemes for PED calculation questions reward 1 mark per percentage change + 1 for the formula + 1 for the answer. Show all four steps. Final-answer-only loses three of the four marks.
See the full worked example for price elasticity of demand →
Memorise the values and what each means for consumer behaviour.
1. Perfectly inelastic — |PED| = 0.
2. Inelastic — 0 < |PED| < 1.
3. Unit elastic — |PED| = 1.
4. Elastic — |PED| > 1.
5. Perfectly elastic — |PED| = ∞.
The categorical rule of thumb.
| |PED| | Category | Curve | Example | |---|---|---|---|---| | 0 | Perfectly inelastic | Vertical | Life-saving medicine | | 0-1 | Inelastic | Steep | Petrol, salt | | 1 | Unit elastic | (Constant revenue) | Reference point | | >1 | Elastic | Flat | Luxury goods | | ∞ | Perfectly elastic | Horizontal | Theoretical |
Cambridge tip. Mark schemes test category-VALUE pairs. Make sure you can match each category to its numerical range and to a typical example.
Four key factors. Memorise them.
1. Availability of substitutes.
More substitutes → more ELASTIC (consumers can switch). Few substitutes → INELASTIC.
Examples.
2. Necessity vs luxury.
Necessity → INELASTIC (must buy regardless of price). Luxury → ELASTIC (can be foregone).
Examples.
3. Proportion of income spent on the good.
Small share of income → INELASTIC (consumer barely notices). Large share of income → ELASTIC.
Examples.
4. Time period.
Short term → INELASTIC (no time to adjust). Long term → ELASTIC (consumers find substitutes, change habits).
Example: petrol.
Cambridge tip. 8-mark "explain determinants of PED" questions appear most series. Memorise these four factors and have an example ready for each.
Inelastic + price rise = more revenue. Elastic + price rise = less revenue.
Total revenue (TR) = Price × Quantity.
When price changes, BOTH P and Q change — but the SIZE of each change determines whether revenue rises or falls. PED tells you which dominates.
Inelastic demand (|PED| < 1).
Quantity changes by a SMALLER % than price. So:
Elastic demand (|PED| > 1).
Quantity changes by a LARGER % than price. So:
Unit elastic (|PED| = 1).
Both changes are equal in % terms. Revenue stays constant.
Worked example. A bus company is considering a 10% fare increase. PED = -0.4 (inelastic).
The decision rule for firms. Firms with INELASTIC demand can raise prices to raise revenue. Firms with ELASTIC demand should LOWER prices to raise revenue.
Worked example: government tax. Indirect taxes are most often imposed on goods with INELASTIC demand (cigarettes, fuel) — because consumers can't easily reduce consumption, the government raises revenue without much fall in tax-base quantity.
Cambridge tip. Mark schemes for PED-revenue questions ALWAYS test both directions (inelastic and elastic). Make sure you can apply the rule both ways.
See the full worked example for price elasticity of demand →
Verbatim phrases and definitions Cambridge mark schemes credit.
PED appears on every Paper 1 and most Paper 2 questions. Calculations (4 marks), categorisation (3-5 marks), determinants (8 marks), and revenue applications (6-8 marks) all recur. Examiner reports flag the same errors: inverted formula, wrong PED-revenue rule direction, and confusing elastic with inelastic.
Sources: Cambridge IGCSE Economics 0455 syllabus (for examination from 2024 onwards); 0455 Examiner Reports — Paper 1 / Paper 2, 2022-2024; 0455/22 May/Jun 2024 question paper and mark scheme. Last reviewed 2026-05-08.
Step-by-step solutions to past-paper-style questions on price elasticity of demand, written exactly the way a tutor would explain them at the board.
Question
Define what is meant by 'price elasticity of demand (PED)'. (2 marks)
Step-by-step solution
Step 1
'Define' is point-marked (up to 2). State 'responsiveness', then the two variables.
Step 2
The two parts (1 + 1). A measure of the responsiveness of quantity demanded (1) to a change in price (1) — PED = %ΔQ_d ÷ %ΔP.
Answer
Price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price (1), calculated as the percentage change in quantity demanded divided by the percentage change in price (1).
Examiner tip
Mark-scheme idea = 'responsiveness of quantity demanded to a price change'. Quoting the formula (%ΔQ_d ÷ %ΔP) secures the second mark.
Question
When the price of a product rises from 10to12, quantity demanded falls from 100 to 90 units. Calculate the PED and state whether demand is elastic or inelastic. (4 marks)
Step-by-step solution
Step 1
% change in quantity demanded (1). ΔQ = 90 − 100 = −10 → −10/100 × 100 = −10%.
Step 2
% change in price (1). ΔP = 12 − 10 = +2 → +2/10 × 100 = +20%.
Step 3
Apply the formula (1). PED = %ΔQ_d ÷ %ΔP = −10 ÷ 20 = −0.5.
Step 4
Interpret (1). |PED| = 0.5 < 1 → demand is inelastic — a 20% price rise caused only a 10% fall in quantity.
Answer
% change in quantity = −10/100 × 100 = −10%; % change in price = +2/10 × 100 = +20%; PED = −10 ÷ 20 = −0.5 (2). Since |PED| = 0.5 < 1, demand is inelastic — consumers are not very responsive to the price change (2). (The negative sign reflects the inverse price–quantity relationship; mark schemes accept the absolute value for the category.)
Examiner tip
Show every step: the two percentage changes, the formula, the answer, and the category. Answers without working earn only the final mark.
Question
Analyse the factors that determine whether the demand for a good is price-elastic or price-inelastic. (6 marks)
Step-by-step solution
Step 1
Substitutes (up to 2). More close substitutes → demand more elastic (consumers can switch easily); few substitutes → inelastic.
Step 2
Necessity vs luxury (up to 2). Necessities → inelastic (must be bought regardless of price); luxuries → elastic (can be given up).
Step 3
Proportion of income / time (up to 2). Goods taking a large share of income → more elastic; and demand is more elastic over time as consumers find substitutes and change habits.
Answer
Several factors determine PED. Availability of substitutes: the more close substitutes a good has, the more elastic demand is, because consumers can easily switch if the price rises (e.g. one brand of cola); a good with few substitutes (e.g. petrol for a driver) is inelastic. Necessity versus luxury: necessities such as basic food or medicine have inelastic demand because people must buy them whatever the price, while luxuries such as holidays have elastic demand because they can be postponed. Proportion of income: a good that takes a large share of income (a car) tends to be elastic, while a cheap good (salt) is inelastic. Time period: demand is usually more elastic in the long run, as consumers have time to find alternatives. So PED depends mainly on how easily consumers can do without, or switch away from, the good.
Examiner tip
6-mark 'Analyse': develop several determinants, each linked to elastic OR inelastic with an example. The unifying idea — 'how easily can the consumer avoid buying it?' — earns the higher marks.
Question
A bus company is considering raising fares by 10%. The estimated PED for bus travel is -0.4. Analyse whether the company should expect total revenue to rise or fall. (6 marks)
Step-by-step solution
Step 1
Identify the category (1). |PED| = 0.4 < 1 → demand is inelastic.
Step 2
Estimate the quantity change (up to 2). Quantity falls by 0.4 × 10% = 4% when fares rise 10%.
Step 3
Compare and conclude (up to 3). Revenue = price × quantity. Price +10%, quantity −4% → revenue rises by roughly +6%, so total revenue rises.
Answer
The PED of −0.4 means demand is inelastic (|PED| = 0.4 < 1), so quantity demanded responds less than proportionately to price. A 10% fare rise would cut passenger numbers by only about 0.4 × 10% = 4%. Since total revenue = price × quantity, the 10% rise in price outweighs the 4% fall in quantity, so total revenue rises by roughly 6%. The general rule is: when demand is inelastic, raising the price increases total revenue (and lowering it reduces revenue); when demand is elastic, the opposite holds. So the bus company should expect higher total revenue — though it should remember that fewer people travelling has social effects too.
Examiner tip
6-mark 'Analyse': category → quantity change → compare % changes → revenue conclusion, with the general PED–revenue rule. INELASTIC + price rise → revenue RISES is heavily examined.
Question
Discuss whether or not a firm should raise the price of its product in order to increase its total revenue. (8 marks)
Step-by-step solution
Step 1
Level-marked evaluation. The answer turns on PED — argue both cases, then judge.
Step 2
When raising price works. If demand is inelastic (|PED| < 1), a price rise causes a smaller % fall in quantity, so total revenue rises — sensible for necessities or goods with few substitutes.
Step 3
When it does not. If demand is elastic (|PED| > 1), a price rise causes a larger % fall in quantity, so total revenue falls — likely if there are many substitutes; the firm may also lose customers to rivals permanently.
Step 4
Judgement. Depends on the PED of the product (and on costs/profit, not just revenue) — raise price only if demand is inelastic.
Answer
Whether raising the price increases total revenue depends mainly on the price elasticity of demand. If demand is inelastic (|PED| < 1) — for example a necessity or a good with few substitutes — a price rise causes only a small percentage fall in quantity, which is outweighed by the higher price, so total revenue rises; here raising the price is sensible. If demand is elastic (|PED| > 1) — for example a good with many close substitutes — a price rise causes a larger percentage fall in quantity, so total revenue falls, and the firm may lose customers to competitors, possibly for good. Other factors matter too: the firm should consider costs and profit (not just revenue), the reaction of rivals, and the effect on its reputation. Judgement: a firm should raise its price to increase revenue only if it knows demand is inelastic; if demand is elastic, raising the price would reduce revenue and it should not. So the decision depends on the PED of the product, which is why estimating elasticity is so useful to firms.
Examiner tip
Level 3 (6–8): the inelastic case (revenue rises) weighed against the elastic case (revenue falls) plus costs/rivals, with a 'depends on PED' judgement. The PED-revenue link is the core idea; noting revenue ≠ profit adds depth.
Question
Discuss whether or not a government should place high taxes on goods with inelastic demand, such as cigarettes and petrol. (8 marks)
Step-by-step solution
Step 1
Level-marked evaluation. Argue the case for taxing inelastic goods, then the drawbacks, then judge.
Step 2
Why it is attractive. Because demand is inelastic, a tax raises lots of government revenue without cutting quantity much; for demerit goods (cigarettes) it also discourages a harmful activity and can reduce pollution (petrol → sustainability).
Step 3
Drawbacks. Inelastic demand means consumers keep buying, so the tax is regressive (hits the poor hardest) and may not cut consumption much; can fuel inflation; smuggling/black markets.
Step 4
Judgement. Good for revenue and discouraging demerit goods/pollution, but regressive and limited as a deterrent — depends on the aim (revenue vs reducing consumption) and on support for low-income groups.
Answer
Taxing goods with inelastic demand has clear attractions but also costs. Why governments do it: because demand is inelastic, consumers keep buying even when the price rises, so an indirect tax raises large and reliable revenue without greatly reducing the quantity sold — ideal for funding public services. For demerit goods such as cigarettes, the tax also discourages a harmful activity (improving health), and taxing petrol can reduce pollution and carbon emissions, supporting sustainability. Drawbacks: the very fact that demand is inelastic means consumption falls only a little, so as a way of stopping people smoking or driving it is weak; the tax is regressive — it takes a larger share of income from the poor, worsening inequality; it can add to cost-push inflation; and very high taxes can encourage smuggling and black markets. Judgement: high taxes on inelastic goods are an effective way to raise revenue and to discourage demerit goods and pollution to some degree, so they are often justified — but they are regressive and only a limited deterrent. Whether they are wise depends on the government's main aim: if it is revenue or sustainability, the tax works well; if it is mainly to cut consumption, it must be combined with other measures, and support for low-income groups is needed to offset the regressive effect.
Examiner tip
Level 3 (6–8): revenue and demerit-good/pollution benefits weighed against the regressive effect and weak deterrent (because demand is inelastic), with a 'depends on the aim' judgement. The petrol/sustainability angle fits the 2027-2029 cycle.
High-scoring sample answers for price elasticity of demand on the Cambridge IGCSE 0455 paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.
Define what is meant by 'inelastic demand'. (2 marks)
Model answer
Inelastic demand is when the quantity demanded changes by a smaller percentage than the price (1), so |PED| is less than 1; quantity demanded is not very responsive to a price change (e.g. petrol, basic food) (1).
Why this scores
One mark for 'quantity changes by a smaller % than price', one for '|PED| < 1' or a valid example. Contrast with elastic demand (|PED| > 1).
When a firm cuts its price from 20to16, quantity demanded rises from 200 to 260 units. Calculate the PED and state whether demand is elastic or inelastic. (4 marks)
Model answer
% change in quantity = (260 − 200) ÷ 200 × 100 = +30% (1). % change in price = (16 − 20) ÷ 20 × 100 = −20% (1). PED = %ΔQ_d ÷ %ΔP = +30 ÷ −20 = −1.5 (1). Since |PED| = 1.5 > 1, demand is elastic — quantity demanded responds more than proportionately to the price change (1).
Why this scores
Show both percentage changes and the formula. |PED| = 1.5 > 1 → elastic. Method marks are available for correct working even if a figure slips.
Analyse why the demand for petrol tends to be price-inelastic. (6 marks)
Model answer
Demand for petrol tends to be price-inelastic — quantity demanded changes by a smaller percentage than price — for several reasons. Few close substitutes: for most drivers there is no practical alternative fuel for an existing petrol car, so when the price rises they cannot easily switch, and quantity demanded falls only a little. It is close to a necessity: many people must drive to get to work or transport goods, so they keep buying petrol almost regardless of price. Small proportion of income (in the short run): for many households petrol is a relatively small part of total spending, so a price rise is tolerated rather than avoided. Time: in the short run people cannot change their cars or where they live, so demand is especially inelastic; over the long run it becomes a little more elastic as some switch to electric cars or public transport. Because demand is inelastic, a rise in the petrol price (or a tax on it) reduces consumption only slightly — which is why it is attractive for taxation. So petrol is inelastic mainly because consumers cannot easily do without it or switch away in the short run.
Why this scores
6-mark 'Analyse': apply the determinants (few substitutes, necessity, proportion of income, time) specifically to petrol. The short-run vs long-run point is a strong addition.
Analyse how the price elasticity of demand affects the change in a firm's total revenue when it raises its price. (6 marks)
Model answer
Total revenue is price × quantity sold, and how it changes when a firm raises its price depends on PED. If demand is inelastic (|PED| < 1), the percentage fall in quantity is smaller than the percentage rise in price, so the higher price more than makes up for the lost sales and total revenue rises — for example, a 10% price rise with PED of −0.4 cuts quantity by only 4%, raising revenue. If demand is elastic (|PED| > 1), the percentage fall in quantity is larger than the percentage rise in price, so the lost sales outweigh the higher price and total revenue falls — a 10% price rise with PED of −2 cuts quantity by 20%, reducing revenue. If demand is unit elastic (|PED| = 1), the two percentage changes are equal, so total revenue is unchanged. So PED tells a firm whether raising its price will increase, reduce or leave unchanged its revenue — which is exactly why elasticity is useful for pricing decisions.
Why this scores
6-mark 'Analyse': cover inelastic (revenue up), elastic (revenue down) and unit elastic (unchanged), each with the % comparison. Linking it to pricing decisions shows applied understanding.
Discuss whether or not a railway company should raise its ticket prices to increase its total revenue. (8 marks)
Model answer
Whether a railway company should raise fares to increase revenue depends largely on the price elasticity of demand of its passengers. Why raising fares could increase revenue: for many commuters, rail travel is close to a necessity with few good substitutes (especially where roads are congested), so their demand is inelastic; a fare rise would cut passenger numbers only a little, so the higher price outweighs the fall in journeys and total revenue rises. Why it might not: for leisure travellers, demand is more elastic — they have substitutes (car, coach, or simply not travelling) — so a fare rise could cause a large fall in their journeys, reducing revenue from that group; higher fares may also anger passengers, attract political criticism, and push people towards cars, which has environmental and congestion effects. The company should also consider costs and capacity, and whether the government regulates fares. Judgement: the railway should raise fares to increase revenue only where demand is inelastic — for example on commuter routes with no good alternative — but it should be cautious on leisure routes where demand is elastic, as a rise there could reduce revenue. The best policy may be differential pricing (peak vs off-peak), charging more where demand is inelastic and less where it is elastic. So the decision depends on the PED of each group of passengers.
Why this scores
Level 3 (6–8): inelastic commuter demand (revenue up) weighed against elastic leisure demand (revenue down), plus costs/regulation/environment, with a 'depends on PED; differential pricing' judgement. Distinguishing passenger types is the discriminator.
Discuss whether or not price elasticity of demand is the most useful piece of information for a firm when setting its prices. (8 marks)
Model answer
PED is very useful for pricing, but whether it is the most useful information is debatable. Why PED is very useful: it tells the firm how quantity demanded will respond to a price change, and therefore whether a price rise or cut will increase or reduce total revenue — essential for deciding pricing strategy; a firm facing inelastic demand can raise prices to boost revenue, while one facing elastic demand knows not to. Why other information may matter more: to set prices well a firm also needs to know its costs (it must cover them to make a profit, and revenue is not the same as profit), the prices and likely reactions of competitors, the incomes and tastes of its customers (income elasticity), and any regulation; PED estimates are also hard to measure accurately and can change over time. For a firm in a very competitive market, the rivals' prices may matter more than its own PED. Judgement: PED is one of the most useful pieces of information for pricing because it directly links price to revenue, but it is not the only thing that matters — a firm must also weigh costs, competitors and profit. So PED is extremely valuable but not sufficient on its own; the best pricing decisions combine PED with knowledge of costs and the market. Its usefulness also depends on how reliably it can be estimated.
Why this scores
Level 3 (6–8): PED's price-to-revenue value weighed against costs, competitors, profit and measurement difficulty, with a 'very useful but not sufficient' judgement. Noting revenue ≠ profit and that PED is hard to measure are strong discriminators.
The formulae you need to memorise for price elasticity of demand on the Cambridge IGCSE 0455 paper, with every variable defined in plain English and a note on when to use it.
PED=% change in price% change in quantity demanded
When to use
Calculating responsiveness of demand to price changes. The result tells you how consumers will respond to a price change.
Example
Price up 20%; quantity down 10% → PED = -10/20 = -0.5 → inelastic.
% change=oldnew−old×100
When to use
Calculating the percentage change in price or quantity for elasticity formulas.
Example
Quantity 100 → 90: % change = (90-100)/100 × 100 = -10%.
Definitions to memorise and the exact keywords mark schemes credit for price elasticity of demand answers — sharpened from recent examiner reports for the 2026 0455 sitting.
A measure of the responsiveness of quantity demanded to a change in price. PED = %ΔQ_d / %ΔP.
|PED| > 1. Quantity demanded changes by a LARGER percentage than price.
|PED| < 1. Quantity demanded changes by a SMALLER percentage than price.
|PED| = 1. Quantity demanded changes by the SAME percentage as price.
|PED| = 0. Quantity demanded does not respond at all to price changes. Vertical curve.
|PED| = ∞. Any price change causes infinite change in quantity. Horizontal curve.
The traps other students keep falling into on price elasticity of demand questions — taken from recent Cambridge IGCSE 0455 examiner reports and mark schemes — and how to avoid them.
0455 Examiner Reports 2022-2024
Why it happens
Forgetting which way around.
How to avoid it
PED = %ΔQ_d / %ΔP. The numerator is QUANTITY DEMANDED, the denominator is PRICE. Memorise: Q on top, P on bottom.
Why it happens
PED is normally negative (price-quantity inverse).
How to avoid it
PED is almost always negative because price and quantity move in opposite directions. Mark schemes typically accept the ABSOLUTE VALUE for categorisation. State the negative sign in the calculation, then use |PED| for the elasticity category.
Why it happens
Memorisation slip.
How to avoid it
INELASTIC + price rise = revenue RISES. ELASTIC + price rise = revenue FALLS. Memorise both halves.
Why it happens
Both end in 'elastic'.
How to avoid it
ELASTIC = stretchy = responsive (|PED| > 1). INELASTIC = NOT stretchy = unresponsive (|PED| < 1). Use the >1/<1 rule to check.
The things students keep getting wrong in this sub-topic, answered.