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Elasticity of Demand

Measure how strongly demand reacts to price changes.

  • Define and explain Elasticity of Demand in your own words
  • Use key terms such as price elasticity of demand accurately
  • Apply what you have learned to new examples and questions
  • Avoid the common mistakes learners make with this topic

This lesson focuses on Elasticity of Demand: measure how strongly demand reacts to price changes.

Definition: Elasticity of Demand

Measure how strongly demand reacts to price changes.

Key ideas

Elasticity shapes pricing

Demand for luxuries with many substitutes, like restaurant meals, tends to be price elastic: a small price rise causes a big fall in quantity. Necessities like bread are inelastic. Firms use this insight: raising prices increases revenue only when demand is inelastic.

Equilibrium and shifts

Where the demand and supply curves cross is the equilibrium: the market clears. If demand rises — say a heatwave boosts ice-cream demand — the curve shifts right, pushing price and quantity up to a new equilibrium. Surpluses push prices down; shortages push them up.

Key term — price elasticity of demand: A measure of how much quantity demanded changes when price changes. Elastic demand reacts strongly to price; inelastic demand barely moves.

Worked example: Elasticity of Demand

If price rises and quantity demanded barely changes, is demand elastic or inelastic?

Inelastic.

Answer: Inelastic.

Common mistakes
  • Saying demand 'shifts' when price changes A price change causes a movement along the curve; only other factors, like income or tastes, shift the whole curve.
  • Dropping the minus sign on PED PED is normally negative because price and quantity move in opposite directions — keep the sign, or compare the absolute value with 1.

Practice

A good's price rises 10% and quantity demanded falls 25%. Calculate PED.
%ΔQ ÷ %ΔP.

PED = −25 ÷ 10 = −2.5 (elastic).

Why might a firm with inelastic demand raise its prices?
Think about revenue.

Because quantity falls only slightly, so total revenue rises.

A tax is placed on sugary drinks. Using demand and supply, what happens to price and quantity?
Think about a shift.

The tax shifts supply left (up): equilibrium price rises and quantity falls.

At equilibrium, what is true about quantity demanded and quantity supplied?
They match.

They are equal — the market clears with no shortage or surplus.

Quick check

Elasticity of Demand — quick check

Which of these best defines "price elasticity of demand"?

A measure of how much quantity demanded changes when price changes. Elastic demand reacts strongly to price; inelastic demand barely moves.

Give one example of a negative externality.

Any one of: factory air pollution, traffic congestion, noise from building work, cigarette smoke.
Key takeaways
  • Elasticity of Demand: measure how strongly demand reacts to price changes.
  • Elasticity shapes pricing: Demand for luxuries with many substitutes, like restaurant meals, tends to be price elastic: a small price rise causes a big fall in quantity.
  • equilibrium: The price and quantity where quantity demanded equals quantity supplied.
  • Watch out for: saying demand 'shifts' when price changes
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