Chapter 05: Elasticity
Explainer, notes, worksheet and data.
Explainer
What you must be able to do
- calculate Price Elasticity of Demand (PED) and Income Elasticity of Demand (YED) using formulae
- Interpreting the varying levels of price elasticity of demand, using graphs and theory
- evaluate how PED and YED can be used by individuals, firms and the government to help predict the impact of pricing on revenue
Core ideas
Price elasticity is just a way of saying how sensitive consumers' demand/income is to a change in the price of a good. There are several factors as to why some products are more elastic than others and this chapter will aim to shed some light on this idea.
In terms of difficulty level, this chapter is on the trickier side. It can take some time to wrap your head around the concept of elasticity. So, its important to be patient and dilligent when studying this chapter.
Exam focus
Exam questions on this chapter can cover three main areas:
- using the formualas in log tables to calculated PED/YED for a given product/data
- interpreting the economic meaning of the PED/YED figure of a given product
- explaining the usefulness of understanding PED and YED for individuals, firms and policymakers
Interactive: Elasticity Calculator
Select the elasticity type, then enter the percentage changes. The formula updates live — each box shows its role in the calculation.
PED = %ΔQd ÷ %ΔP = (−20%) ÷ (10%) = −2.00
Interactive: Visualising Elasticity on the Demand Curve
The slope of the demand curve reflects price elasticity. Drag the slider from perfectly inelastic (vertical — consumers buy the same amount regardless of price) to perfectly elastic (horizontal — consumers will only buy at one price).
Note: PED varies along a linear demand curve — it equals −1 only at the midpoint. The slider moves the entire curve to show how different slopes correspond to different elasticity values at the same reference point.