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Price Elasticity of Demand (PED) – O Level Economics (2281) / IGCSE Economics (0455)

Introduction

In economics, changes in price can affect the quantity demanded of a product. However, different goods respond differently to price changes.

Students studying Cambridge O Level Economics 2281 and Cambridge IGCSE Economics 0455 learn how economists measure this responsiveness using Price Elasticity of Demand (PED).

Understanding PED helps businesses and governments predict how consumers will react to price changes.

What is Price Elasticity of Demand?

Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price.

In simple terms, it shows how much demand changes when the price of a product changes.

PED Formula

The formula used to calculate PED is:

PED = Percentage change in quantity demanded
      -------------------------------------
        Percentage change in price

The value of PED helps determine whether demand is elastic or inelastic.

Types of Price Elasticity of Demand

Elastic Demand

Demand is elastic when:

PED > 1

This means quantity demanded changes significantly when price changes.

Examples:

  • Luxury goods

  • Restaurant meals

  • Electronics

Consumers can easily reduce consumption if prices rise.

Inelastic Demand

Demand is inelastic when:

PED < 1

This means quantity demanded changes only slightly when price changes.

Examples:

  • Petrol

  • Basic food items

  • Medicines

Consumers still buy these goods even if prices increase.

Unit Elastic Demand

Demand is unit elastic when:

PED = 1

This means the percentage change in price equals the percentage change in quantity demanded.

Factors Affecting PED

Several factors influence the elasticity of demand.

Availability of Substitutes

Goods with many substitutes tend to have elastic demand.

Example:

Tea and coffee.

Necessities vs Luxury Goods

  • Necessities usually have inelastic demand

  • Luxury goods usually have elastic demand

Proportion of Income

Goods that take a large portion of income often have more elastic demand.

Example:

Cars or expensive electronics.

Time Period

Demand often becomes more elastic over time because consumers have more time to adjust their behavior.

Importance of PED

Price elasticity of demand is important because it helps:

✔ Businesses set optimal prices

✔ Governments predict tax effects

✔ Firms estimate revenue changes

✔ Economists understand consumer behavior

Companies often analyze PED before changing prices.

Exam Tips for Students

Students studying O Level Economics (2281) and IGCSE Economics (0455) should be able to:

✔ Define PED clearly

✔ Calculate PED using the formula

✔ Identify elastic and inelastic goods

✔ Draw elasticity diagrams

PED calculations and diagrams frequently appear in exam questions.

Learn Economics with IVY Online

At IVY Online, students preparing for Cambridge Economics exams can access:

  • Step-by-step elasticity explanations

  • Diagram tutorials

  • Past paper practice

  • Exam-focused revision strategies

This helps students understand economics concepts clearly and perform well in exams.