Price elasticity of demand and supply

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Price elasticity of demand (PED)

PED compares percentage quantity-demanded change with percentage own-price change, holding other demand determinants fixed. It is usually signed negative on downward-sloping demand. Use magnitude for classification: above 1 elastic; below 1 inelastic; 1 unit elastic; 0 perfectly inelastic. A vertical demand curve has fixed quantity; a horizontal perfectly elastic curve is an ideal limiting model at a stated price.
State the required method. Under original-value percentages, each change is (new − old)/old × 100. Midpoint methods use different bases and can give different finite estimates; follow the question. Elasticity is dimensionless and differs from slope: a straight-line curve can have different proportional responsiveness at different points.

Classify by PED magnitude

Factors affecting PED

Substitutes, necessity, spending share, switching costs, habits and time affect responsiveness. More close accessible alternatives often increase elasticity; necessary uses with few alternatives can constrain it. These are contextual tendencies rather than permanent product labels.
Longer time may permit changes in equipment or habits, but does not guarantee a particular coefficient. Market definition matters: one brand can face more close alternatives than a broad product category. Product colour can affect preferences, so dismiss it only under an explicit no-effect assumption.

Explain the response in context

Why it matters to firms

For a small change on a demand segment that remains elastic, a price cut raises revenue; on an inelastic segment, a price rise raises revenue. These rules need the relevant local or interval conditions. For finite given changes, directly calculate TR = P × units sold at both endpoints. Higher revenue need not increase profit because costs and capacity matter.
Bakery price factor 1.10 times quantity factor 0.95 gives 1.045, so revenue rises 4.5%. Jacket price factor 0.80 times quantity factor 1.50 gives 1.20, so revenue rises 20%. Use these products rather than simply adding signed percentages, which omits their interaction.

Fictional finite revenue checks

Calculation

With price +10% and quantity −20%, signed PED = −20/+10 = −2, magnitude 2, elastic. With price +10% and quantity −25%, PED −2.5 and revenue factor 1.10 × 0.75 = 0.825: revenue falls 17.5%.
Equal opposite finite original-base changes do not exactly cancel: £10/100 units gives £1,000 while £11/90 gives £990, despite an original-base PED magnitude 1. Constant unit elasticity instead follows a reciprocal demand such as P = 400/Q, where revenue remains £400. Distinguish a local elasticity rule from exact finite arithmetic.

Fictional constant-revenue demand

Price elasticity of supply (PES)

PES = percentage change in quantity supplied divided by percentage change in own price, with other supply determinants held constant. Fictional price £10 to £12 gives +20%; quantity 100 to 130 gives +30%; PES = 1.5. Conventional supply gives positive PES, classified above 1 elastic and below 1 inelastic.
Usable spare capacity, saleable stocks, flexible inputs and longer lead times can increase supply responsiveness. Growing times, perishability and bottlenecks constrain it. A change in own price is movement along supply; a cost or technology change can shift the relationship.

Fictional PES calculation

Extension: income elasticity

YED measures percentage quantity-demanded change divided by percentage income change, with other determinants unchanged. A positive coefficient indicates normal and a negative coefficient inferior over the stated range. Neither is a quality label.
YED is included as extension material; AQA 8136’s core elasticity content is PED and PES. Keep the changed determinant clear and use the exam board’s requirements rather than assuming all courses have identical coverage.

Extension: distinguish the cause

Slope and proportional responsiveness

Fictional P = 10 − 0.1Q has constant slope −0.1. At Q20/P8 and Q80/P2, equal absolute changes represent different percentages of the starting prices and quantities. The magnitude of point elasticity therefore varies along the line.
Comparing visual steepness is meaningful only with suitable common axes and points; changing units can alter slope without altering elasticity. The reciprocal P = 400/Q is a contrasting constant unit-elastic curve with unchanged total revenue throughout its positive range.

Same slope, different percentage bases

Tax receipts and incidence

For a specific per-unit tax, revenue is the tax per unit multiplied by taxable quantity. A less responsive demand may preserve quantity, but the tax rate, supply response, compliance and avoidance determine receipts. Policy may also pursue health or environmental objectives rather than revenue alone.
In a standard competitive market, the relatively less elastic side bears more of the economic tax burden. This differs from who legally remits the tax. Consider consumers, producers and distributional effects without assuming inelastic means no quantity change or that demand alone determines incidence.

Separate tax questions

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1.What does PED measure?
Easy
- Aresponsiveness of quantity demanded to a price change
- Bthe price
- Cincome
- Dprofit
2.What does elastic demand mean?
Easy
- Aquantity changes by a smaller percentage
- Bno change
- Calways one
- Dquantity demanded responds by a larger percentage than price, in magnitude
3.What does inelastic demand mean?
Easy
- Ano change ever
- Balways one
- Cquantity changes by a smaller percentage than price
- Dquantity changes by a larger percentage
4.What is unit elastic demand?
Easy
- Ainfinite
- BPED magnitude equals 1
- CPED equals 0
- DPED equals 2
5.What is perfectly inelastic demand?
Easy
- Aquantity does not change as price changes
- Bquantity changes a lot
- Cdemand is zero
- Ddemand is infinite
6.Price falls 5% and quantity demanded rises 15%, other determinants unchanged. What is the magnitude of PED?
Easy
- A0.33
- B20
- C10
- D3
7.Price rises 20% and quantity demanded falls 10%, other determinants unchanged. What is the magnitude of PED?
Easy
- A30
- B10
- C0.5
- D2
8.Which factor makes demand more elastic?
Easy
- Abeing cheap
- Bmany substitutes
- Cbeing a necessity
- Dbeing addictive

Mehr Fragen

9.Which factor makes demand more inelastic?
Easy
- Abeing a necessity with few substitutes
- Bmany substitutes
- Cbeing a luxury
- Dbeing expensive
10.When buyers have more time to find and use close alternatives, demand often becomes more elastic in the:
Easy
- Ashort run
- Bequal
- Cneither
- Dlong run
11.Why may some established consumers of an addictive product show limited short-run price responsiveness?
Easy
- Athey are luxuries
- Bthey are cheap
- Cdependence can make immediate adjustment difficult
- Dmany substitutes
12.For a small price cut on a demand segment that remains elastic, what happens to sales revenue, other factors unchanged?
Medium
- Arevenue vanishes
- Brevenue rises
- Crevenue falls
- Drevenue stays
13.For a small price rise on a demand segment that remains inelastic, what happens to sales revenue, other factors unchanged?
Medium
- Arevenue rises
- Brevenue falls
- Crevenue stays
- Drevenue vanishes
14.Why can relatively inelastic demand help preserve tax receipts after an indirect tax raises the consumer price?
Medium
- Aconsumers stop buying
- Brevenue falls
- Cthere is no effect
- Dtaxable quantity may fall less, though receipts depend on the rate and other conditions
15.Why might a firm cut prices when demand is elastic?
Medium
- Ato lower revenue
- Bto avoid selling
- Cto raise total revenue
- Dto lose sales
16.What is PES?
Medium
- Aprofit
- Bresponsiveness of quantity supplied to a price change
- Cresponsiveness of demand
- Dprice
17.What makes supply more elastic?
Medium
- Aspare capacity and stocks
- Bno stocks
- Cno spare capacity
- Dshort time
18.A bakery raises its uniform price 10% and sells 5% fewer loaves. What are PED magnitude and the revenue result?
Medium
- A2, elastic, revenue rises
- B0.5, elastic, revenue falls
- C2, inelastic, revenue falls
- D0.5, inelastic, revenue rises
19.A shop cuts its uniform jacket price 20% and sales rise 50%. What are PED magnitude and the revenue result?
Medium
- A2.5, elastic, revenue falls
- B0.4, inelastic, revenue falls
- C2.5, elastic, revenue rises
- D0.4, inelastic, revenue rises
20.Why can fresh-crop supply be relatively inelastic immediately after a price change?
Medium
- Asupply is fixed forever
- Bthey take time to grow
- Cthey can be made instantly
- Dstocks are unlimited
21.What does a negative income elasticity of demand indicate?
Medium
- Aan inferior good
- Ba normal good
- Ca luxury
- Da complement
22.What is YED?
Easy
- Aprice elasticity
- Bsupply
- Cprofit
- Dresponsiveness of demand to a change in income
23.What is total revenue?
Easy
- Aquantity only
- Bprofit
- Cprice times quantity sold
- Dprice only
24.What is the formula for PED?
Medium
- Acost ÷ revenue
- B% change in quantity demanded ÷ % change in price
- Cprice ÷ quantity
- Dquantity ÷ price
25.What is 'proportion of income' effect on elasticity?
Medium
- Agoods that cost a small share of income tend to be inelastic
- Ball goods are elastic
- Cno effect
- Dgoods are inelastic if expensive
26.If the magnitude of PED is greater than 1, demand is price elastic.
Easy
True or false?
27.Necessities tend to have inelastic demand.
Easy
True or false?
28.For a small change on a demand segment that remains elastic, a price rise increases total revenue.
Easy
True or false?
29.More substitutes make demand more elastic.
Easy
True or false?
30.PED is measured in pounds.
Medium
True or false?
31.Which affect PED?
Medium
- Aavailability of substitutes
- Bnecessity or luxury
- Cproportion of income
- Dtime
- Ean arbitrary colour change assumed to affect neither preferences nor any other determinant
32.Which stated conditions tend to make demand less price responsive in the short run, other factors considered?
Medium
- Anecessary use with few practical substitutes
- Bhigh switching costs over the stated period
- Cdependence limiting immediate adjustment
- Da very small share of the buyer’s budget
- Eeasy deferral with many close accessible substitutes
33.A firm raises the price of a product by 10% and quantity demanded falls by 25%. Calculate PED and explain the effect on revenue.
Medium
34.A fictional supplier’s price rises £10 to £12 and quantity supplied rises 100 to 130 per week, with other supply determinants unchanged. Using original-value percentage bases, what is PES?
Medium
- A0.67
- B3
- C−1.5
- D1.5
35.Price rises from £10 to £11 and sales fall from 100 to 90. Using the original-value percentage method gives PED magnitude 1. What actually happens to revenue?
Medium
- AIt rises to £1,100
- BIt falls to £900
- CIt falls from £1,000 to £990
- DIt stays at £1,000 exactly

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