PED formula and ranges
Responsiveness measure.
Price elasticity of demand (PED):
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Detailed notes on Microeconomics for IB DP Economics, covering key concepts, explanations, examples, and exam-focused revision points.
The things students keep getting wrong in this sub-topic, answered.
Unit 2.5 of the 2022+ syllabus. PED measures responsiveness of quantity demanded to a price change. Critical for pricing decisions, tax incidence, and indirect-tax revenue.
Mapped to the IB DP Economics SL subject guide (2022 onwards (first assessment May 2024)).
Responsiveness measure.
Price elasticity of demand (PED):
What makes demand elastic and why it matters.
Determinants of PED (mnemonic: SPLAT):
Total revenue rule. TR = P × Q.
| Demand | Effect of P↑ on TR |
|---|---|
| Inelastic | TR ↑ (Q falls less than proportionally) |
| Unit elastic | TR unchanged |
| Elastic | TR ↓ (Q falls more than proportionally) |
So a firm with INELASTIC demand can raise revenue by RAISING prices (e.g. utilities). A firm with ELASTIC demand should consider LOWERING prices to boost revenue.
Worked example. A music streaming service has elastic demand (|PED| = 1.5). It currently charges 10m). If it RAISES price to $11 (+10%):
Verbatim phrases, formulae and definitions IB DP mark schemes credit (key for AO1 knowledge marks on Paper 1).
Paper 1: 'Explain how PED affects total revenue.' Paper 2: calculate PED from data and apply to a pricing decision.
Sources: IB Diploma Programme Economics subject guide (IBO, 2020 — first assessment 2022). Last reviewed 2026-05-31.
Step-by-step solutions to past-paper-style questions on ped, written exactly the way a tutor would explain them at the board.
Question
Bread price rises from 5; quantity demanded falls from 200 to 180. Calculate PED and classify. (3 marks)
Step-by-step solution
Step 1
% ΔP = (5−4)/4 = 25%.
Step 2
% ΔQd = (180−200)/200 = −10%.
Step 3
PED = −10% / 25% = −0.4. |PED| = 0.4 → INELASTIC.
Answer
PED = −0.4; inelastic (necessity, few substitutes).
Question
A taxi company faces |PED| = 1.8 for its services. Should it raise prices to boost revenue? Explain. (3 marks)
Step-by-step solution
Step 1
|PED| > 1 → demand is elastic.
Step 2
If price RISES, quantity demanded falls proportionally MORE → total revenue falls.
Step 3
Better strategy: LOWER price → quantity rises more than proportionally → total revenue increases.
Answer
No — elastic demand means raising price reduces TR. Lower prices to boost revenue.
Question
Explain why demand for insulin is highly inelastic, using TWO determinants. (3 marks)
Step-by-step solution
Step 1
Necessity: insulin is essential for survival of diabetic patients — they MUST buy it regardless of price.
Step 2
No substitutes: no close pharmaceutical alternative; patients cannot switch products.
Step 3
Combined → quantity barely changes when price rises → |PED| close to 0.
Answer
Necessity + no substitutes → near-perfectly inelastic demand.
Definitions to memorise and the exact keywords mark schemes credit for ped answers — sharpened from recent examiner reports for the 2026 IB DP Economics SL sitting.
Responsiveness of quantity demanded to a change in the good's own price.
Elastic: |PED| > 1. Inelastic: |PED| < 1. Unit: |PED| = 1.
If demand is inelastic, raising price increases TR. If elastic, raising price decreases TR.
The traps other students keep falling into on ped questions — taken from recent IB DP Economics SL examiner reports and mark schemes — and how to avoid them.
Why it happens
Loose usage.
How to avoid it
Elastic = PROPORTIONALLY larger change in Qd than in P. A 5% Q change for 4% P change is elastic; a 50% Q change for 60% P change is inelastic.
Why it happens
Inelastic convention.
How to avoid it
PED is mathematically negative (Qd and P move opposite). IB typically uses |PED| but be aware of the sign.
Why it happens
Confusing the extremes.
How to avoid it
Perfectly inelastic: VERTICAL (Q unchanged at any P). Perfectly elastic: HORIZONTAL (any quantity at single P).
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PED is mostly negative (price up → quantity demanded down) but typically reported as an absolute value. The IB syllabus uses absolute values when classifying.
Ranges:
| Value | Label | Meaning |
|---|---|---|
| PED | = 0 | |
| 0 < | PED | < 1 |
| PED | = 1 | |
| PED | > 1 | |
| PED | = ∞ |
Worked example. Coffee price rises from 5 (+25%), quantity falls from 100 to 90 (−10%). PED = −10% ÷ +25% = −0.4. |PED| = 0.4, so demand is INELASTIC.
Primary commodities (oil, copper, agricultural products) tend to be inelastic in the short run — few substitutes, used as inputs to many goods. This is why oil price shocks affect economies broadly.
Manufactured goods tend to be more elastic — substitutes available, consumers can defer purchases.
Tax incidence application (preview). When an indirect tax is imposed, the burden falls more heavily on whichever side of the market is MORE INELASTIC (covered fully in Government Intervention).