Price elasticity of demand and supply

G3 Economics - syllabus K343, 2027

Calculate and interpret PED and PES, explain what affects them, and use PED to predict revenue.

• Price elasticity of demand: definition and calculation

  PED measures how strongly quantity demanded responds to a change in price.

• Reading PED values and drawing them

  Above 1 is elastic, below 1 is inelastic, exactly 1 is unitary, 0 is perfectly inelastic.

• What makes demand elastic or inelastic

  Demand is more elastic when there are close substitutes, the good takes a large share of income, or buyers have time to adjust.

• PED, consumer spending and firms' revenue

  If demand is elastic, a price cut raises revenue; if demand is inelastic, a price rise raises revenue.

• Why PED matters to consumers, workers, firms and government

  PED helps firms set prices, governments choose what to tax, and explains who bears a price change.

• Price elasticity of supply

  PES measures how strongly quantity supplied responds to a change in price.

• What makes supply elastic or inelastic

  Supply is more elastic when firms have spare capacity, stocks, mobile resources and time to respond.

• Put it together: Choose a good to tax

  A government wants to raise revenue and improve health. It can raise the tax on one good this year. The price elasticity of demand differs for each.