Price elasticity of demand
Price elasticity of demand: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
Section 2.2 · Price elasticity, income elasticity and cross elasticity of demand
9708 section 2.2; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If PED is −0.4, what is the conventional classification?
What you will learn
- Define and calculate PED, YED and XED
- Interpret coefficient sign and magnitude
- Explain determinants, straight-line variation and implications for expenditure
Core model and terms
PED = percentage change in quantity demanded ÷ percentage change in price; it is usually negative, while the magnitude describes responsiveness. YED divides percentage quantity change by percentage income change. XED divides percentage change in demand for one good by percentage price change of another.
Apply and evaluate
Elasticity depends on substitutes, time, budget share and whether a good is normal, inferior, complementary or substitutable. On a straight-line demand curve, PED varies along its length. For a price change, the relationship between PED and total expenditure applies to the relevant range; use the coefficient’s sign and magnitude carefully.
Pause and explain
Which statement best applies price elasticity of demand?
Worked example
Price rises 5% and quantity demanded falls 15%. Calculate and interpret PED.
Show the worked solution
- PED = −15% ÷ 5%
- PED = −3
- Magnitude 3 means demand is elastic over this change
Answer PED = −15% ÷ 5% → PED = −3 → Magnitude 3 means demand is elastic over this change
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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.
Price rises 5% and quantity demanded falls 15%. Calculate and interpret PED.
Give me a hint
Identify the relevant idea in price elasticity of demand, then trace the economic chain.
Compare my reasoning
- PED = −15% ÷ 5%
- PED = −3
- Magnitude 3 means demand is elastic over this change
PED = −15% ÷ 5% PED = −3 Magnitude 3 means demand is elastic over this change
Look for these in your work
- PED = −15% ÷ 5%
- PED = −3
- Magnitude 3 means demand is elastic over this change
Income rises 4% and demand for a good rises 8%. Calculate YED and classify the good.
Give me a hint
Use percentage quantity change divided by percentage income change.
Compare my reasoning
- YED = 8% ÷ 4% = 2
- YED is positive
- The good is normal and income-elastic in this interval
YED = 8% ÷ 4% = 2 YED is positive The good is normal and income-elastic in this interval
Look for these in your work
- YED = 8% ÷ 4% = 2
- YED is positive
- The good is normal and income-elastic in this interval
The price of tea rises 10% and demand for coffee rises 3%. Calculate XED and interpret the relationship.
Give me a hint
Keep the quantity change for coffee in the numerator.
Compare my reasoning
- XED = 3% ÷ 10% = 0.3
- The coefficient is positive
- Tea and coffee behave as substitutes in this context
XED = 3% ÷ 10% = 0.3 The coefficient is positive Tea and coffee behave as substitutes in this context
Look for these in your work
- XED = 3% ÷ 10% = 0.3
- The coefficient is positive
- Tea and coffee behave as substitutes in this context
A firm considers a price rise where demand is inelastic. Explain the likely revenue direction and one condition.
Give me a hint
Connect price and quantity changes to total expenditure.
Compare my reasoning
- Price rises
- Quantity falls proportionally less if demand is inelastic
- Total revenue tends to rise for a sufficiently small change, other factors held constant
Price rises Quantity falls proportionally less if demand is inelastic Total revenue tends to rise for a sufficiently small change, other factors held constant
Look for these in your work
- Price rises
- Quantity falls proportionally less if demand is inelastic
- Total revenue tends to rise for a sufficiently small change, other factors held constant
Common mistakes
- Dropping the sign before interpreting YED or XED, or using PED as a universal constant along a straight-line curve.
What can you explain now?
If PED is −0.4, what is the conventional classification?
Compare with the explanation
Inelastic demand
The magnitude is below one, so quantity responds proportionally less than price.
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Make it stick
Before moving on, explain the central idea in price elasticity of demand and state one condition that could change its effect.
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.