Calculate and apply elasticity measures
Calculate and interpret price, income and promotional elasticity, then evaluate how useful each measure is for marketing choices.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 8.1.1. Treat forecasts and market estimates as uncertain evidence, and relate recommendations to the stated product and customers. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Use the stated product, target market and period consistently; distinguish a forecast or model from a guaranteed result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is price elasticity of demand calculated?
What you will learn
- Calculate PED, YED and promotional elasticity
- Interpret magnitude and sign in context
- Assess how elasticity evidence can inform marketing decisions and where it is limited
Elasticity measures proportional responsiveness
Price elasticity of demand (PED) = percentage change in quantity demanded ÷ percentage change in price. For a typical downward-sloping demand relationship, PED is negative; questions may ask for its magnitude. A magnitude above one is elastic, below one is inelastic and one is unit elastic.
Income elasticity of demand (YED) = percentage change in quantity demanded ÷ percentage change in income. A positive value is consistent with a normal good; a negative value with an inferior good. Promotional elasticity compares percentage change in demand or sales with percentage change in promotional expenditure over the stated period. Follow the measure and convention specified in the data.
Use measures with care
Elasticity can inform pricing, product, promotion or market decisions. If demand is elastic, a price reduction may raise total revenue under the model; if inelastic, a price rise may raise revenue. These are conditional relationships and assume other influences are controlled.
Results depend on the time period, market definition, data quality and size of the change. An average elasticity between two prices may not predict a different segment or future period. Competitor actions, capacity, costs, brand effects and customer response still matter.
Pause and explain
A product's PED magnitude is 0.6. How is demand classified over the observed range?
Worked example
Price rises by 8% and quantity demanded falls by 12%. Calculate PED and interpret it. Then state one limitation of using this estimate for a price decision.
Show the worked solution
- PED = percentage change in quantity demanded ÷ percentage change in price.
- Calculate −12% ÷ 8% = −1.5.
- Magnitude 1.5 is elastic; the estimate is tied to the observed period and market.
Answer PED = −1.5 (magnitude 1.5), so quantity demanded changed proportionally more than price in the observed data. The estimate may not predict another price range, customer group or period, and it does not include costs or competitor reactions.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Household income rises by 5% and demand for a service rises by 7%. Calculate YED and classify the relationship indicated by the data.
Give me a hint
Divide percentage change in demand by percentage change in income.
Compare my reasoning
- YED = 7% ÷ 5%.
- The result is +1.4.
- A positive YED is consistent with a normal good in the observed context.
YED = +1.4. Demand rose proportionally more than income in this observation; the positive sign is consistent with a normal good. It does not prove how demand will respond at every income level.
Look for these in your work
- Formula and division are correct
- Sign and magnitude are interpreted
- Conclusion is limited to observed data
A firm increases promotional spending by 20% and sales rise by 10%. Calculate promotional elasticity and explain what it suggests.
Give me a hint
Use the stated percentage changes, keeping the same period and sales measure.
Compare my reasoning
- Promotional elasticity = percentage change in sales ÷ percentage change in promotion.
- Calculate 10% ÷ 20%.
- The result below one indicates sales changed proportionally less than promotional spending in this period.
Promotional elasticity is 0.5. Sales changed proportionally less than promotional expenditure in the observed period, but the firm should check other campaigns, timing, customer mix and profit contribution before reducing promotion.
Look for these in your work
- Ratio is calculated
- Magnitude is interpreted
- Other influences and profit are considered
A company plans a price rise because an earlier study found inelastic demand. Explain what further evidence should be checked before deciding.
Give me a hint
Test the scope and period of the estimate and compare revenue with costs and alternatives.
Compare my reasoning
- Check sample, product and customer segment in the study.
- Review the planned price range and current competitor conditions.
- Estimate effects on revenue, margin, retention and capacity.
The company should check that the estimate covers the same product, customer segment and relevant price range and period. It should test current competitor offers and estimate revenue, margin, retention and capacity effects under alternative prices. Inelastic demand alone does not show whether profit or long-term brand value will improve.
Look for these in your work
- Evidence fit is checked
- Current market conditions are considered
- Profit and longer-term effects are evaluated
Common mistakes
- Dividing absolute changes instead of percentage changes
- Dropping the negative sign when the question asks for signed PED
- Treating observed elasticity as permanent or universal
What can you explain now?
How is price elasticity of demand calculated?
Compare with the explanation
Percentage change in quantity demanded divided by percentage change in price
Elasticity compares proportional changes rather than raw units.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do PED, YED and promotional elasticity measure responsiveness, and what limits their use in a decision?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.