What is Price Elasticity of Demand (PED) in Microeconomics?

Price Elasticity of Demand (PED) is a measure used in microeconomics to show how the quantity demanded of a good or service changes in response to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. Understanding PED helps businesses and policymakers predict consumer behavior and make informed decisions.

How is PED calculated in the IB DP Economics curriculum?

In the IB DP Economics curriculum, PED is calculated using the formula: PED = (% Change in Quantity Demanded) / (% Change in Price). To find the percentage changes, you can use the midpoint method, which is more accurate for larger changes. This involves taking the average of the initial and final quantities and prices as the base for calculating percentage changes.

What factors affect the Price Elasticity of Demand?

Several factors influence PED, including the availability of substitutes, the proportion of income spent on the good, the necessity of the product, and the time period considered. Goods with many substitutes tend to have more elastic demand, while necessities or goods with fewer substitutes tend to have inelastic demand. Additionally, PED can vary over time as consumers adjust their behavior.

Why is understanding PED important for businesses and policymakers?

Understanding PED is crucial for businesses as it helps in setting optimal pricing strategies to maximize revenue. If demand is elastic, lowering prices could increase total revenue, while if demand is inelastic, raising prices might be more beneficial. For policymakers, PED insights are vital for assessing the impact of taxes and subsidies on consumption and for making informed decisions about economic policies.

Can you provide examples of goods with elastic and inelastic demand?

Goods with elastic demand include luxury items and non-essential goods, such as electronics or branded clothing, where consumers are sensitive to price changes. In contrast, goods with inelastic demand are typically necessities, such as basic food items, gasoline, and medications, where consumers continue to purchase even if prices rise. Understanding these examples helps in applying PED concepts to real-world scenarios.

Why is "Saying elastic = large change." a common mistake in PED?

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 is "Forgetting PED is negative." a common mistake in PED?

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 is "Drawing perfectly inelastic as horizontal." a common mistake in PED?

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).

MicroeconomicsIB Economics SL

PED

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Price Elasticity of Demand (PED) — IB Economics SL: formula, determinants, total revenue rule

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.

What you’ll learn

Mapped to the IB DP Economics SL subject guide (2022 onwards (first assessment May 2024)).

2.5.1 — Calculate PED and interpret the result.
2.5.2 — Identify determinants of PED.
2.5.3 — Apply the total revenue rule.
2.5.4 — Distinguish primary commodity vs manufactured goods PED.

PED formula and ranges

Responsiveness measure.

Price elasticity of demand (PED):

$PED = \frac{\% \Delta Q_d}{\% \Delta P}$

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 $4 to$ 5 (+25%), quantity falls from 100 to 90 (−10%). PED = −10% ÷ +25% = −0.4. |PED| = 0.4, so demand is INELASTIC.

PED = %ΔQd ÷ %ΔP.
|PED| < 1: inelastic; >1: elastic.
Extreme cases: 0 (vertical) and ∞ (horizontal).

Determinants and the total revenue rule

What makes demand elastic and why it matters.

Determinants of PED (mnemonic: SPLAT):

Substitutes available — more substitutes ⇒ more elastic (consumers can easily switch).
Percentage of income spent on the good — bigger share ⇒ more elastic (price changes hurt budget).
Luxury vs necessity — luxuries more elastic; necessities less elastic.
Addiction / habit — addictive goods (tobacco) less elastic.
Time — longer time horizon ⇒ more elastic (consumers find alternatives).

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 $10 with 1 million subscribers (TR =$ 10m). If it RAISES price to $11 (+10%):

Quantity falls by ~15% to 850 000.
New TR = $11 × 850 000 =$ 9.35m.
TR FELL — confirming elastic demand → raising price reduces revenue.

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).

SPLAT: Substitutes, % income, Luxury, Addiction, Time.
TR rule: inelastic → P↑ raises TR; elastic → P↑ cuts TR.
Primary commodities tend inelastic; manufactured goods more elastic.

How it’s examined

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.

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Step-by-step worked examples — PED

Step-by-step solutions to past-paper-style questions on ped, written exactly the way a tutor would explain them at the board.

1Calculate PED
Building confidence• PED
Question
Bread price rises from $4 to$ 5; quantity demanded falls from 200 to 180. Calculate PED and classify. (3 marks)
Step-by-step solution
1. Step 1
  % ΔP = (5−4)/4 = 25%.
2. Step 2
  % ΔQd = (180−200)/200 = −10%.
3. Step 3
  PED = −10% / 25% = −0.4. |PED| = 0.4 → INELASTIC.
Answer
PED = −0.4; inelastic (necessity, few substitutes).
2Apply the TR rule
Stretch• total revenue
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
1. Step 1
  |PED| > 1 → demand is elastic.
2. Step 2
  If price RISES, quantity demanded falls proportionally MORE → total revenue falls.
3. 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.
3Why insulin has inelastic demand
Getting started• determinants
Question
Explain why demand for insulin is highly inelastic, using TWO determinants. (3 marks)
Step-by-step solution
1. Step 1
  Necessity: insulin is essential for survival of diabetic patients — they MUST buy it regardless of price.
2. Step 2
  No substitutes: no close pharmaceutical alternative; patients cannot switch products.
3. Step 3
  Combined → quantity barely changes when price rises → |PED| close to 0.
Answer
Necessity + no substitutes → near-perfectly inelastic demand.

Key Definitions and Keywords — PED

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.

Price elasticity of demand (PED)
Examiner keyword
Responsiveness of quantity demanded to a change in the good's own price.
Elastic / inelastic
Examiner keyword
Elastic: |PED| > 1. Inelastic: |PED| < 1. Unit: |PED| = 1.
Total revenue rule
Examiner keyword
If demand is inelastic, raising price increases TR. If elastic, raising price decreases TR.

Common Mistakes and Misconceptions — PED

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.

✕Saying elastic = large change.
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.
✕Forgetting PED is negative.
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.
✕Drawing perfectly inelastic as horizontal.
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).

Past paper style quiz

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PED — frequently asked questions

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PED

Short Study Notes in the form of Slides

Short Study Notes — PED

Detailed Notes

What you’ll learn

How it’s examined

1Calculate PED

2Apply the TR rule

3Why insulin has inelastic demand

Price elasticity of demand (PED)

Elastic / inelastic

Total revenue rule

✕Saying elastic = large change.

✕Forgetting PED is negative.

✕Drawing perfectly inelastic as horizontal.

Past paper style quiz

PED — frequently asked questions