Economics IGCSE

1. Topic: Elasticity of Demand & Supply
Price elasticity of demand (PED) &
Price elasticity of supply (PES)
Date: 4th Sep, 2023
Yousaf Dar
Economics Teacher
Mob: +971-553310969 or +92-3214193887

2. Unit 2.7 & 2.8: PED & PES
Learning Objectives
By the end of this topic, you will be able to:
 define price, income and cross elasticity of demand (PED, YED & XED)
 calculate and interpret PED figures
 explore the determinants of PED
 analyze real-life examples to identify elastic and inelastic products in the UAE context
 discuss the significance & implications of PED
 define, calculate & interpret PES

3. Introduction to Elasticity
 So far in the analysis of demand & supply, the focus was on understanding the general direction of any
change in price and its effect on the quantity demanded or supplied.
 Would you expect a rise in the price of gasoline in the UAE to have much impact on the demand for
gasoline?
• OPEC & crude oil price changes
• India’s Jet Airways was the second largest airline in India until it stopped flying in 2019
What do Economists mean by Elasticity?
• Price Elasticity of Demand
PED =
Perentage change in quantity demanded
Perentage change in price
‘
• Income Elasticity of Demand
YED =
Perentage change in quantity demanded
Perentage change in income
• Cross Elasticity of Demand
XED =
Perentage change in quantity demanded for good A
Perentage change in price of good B
Unit 2.7: Price elasticity of demand (PED)

4. Price elasticity of demand (PED):
A measure of the responsiveness of the quantity demanded to a change in price.
PED =
Perentage change in quantity demanded
Perentage change in price
Calculating PED
• Calculate the percentage change in quantity demanded:
Change in demand
original quantity demanded
X 100
• The percentage change in price is:
Change in price
original 𝒑𝒓𝒊𝒄𝒆
X 100
Unit 2.7: Price elasticity of demand (PED)

5. Numerical example for calculating PED:
PED =
Perentage change in quantity demanded
Perentage change in price
For example, the quantity demanded may rise from 200 to 240 as a result of
price falling from $10 to $9. In this case the percentage change in quantity
demanded is:
Change in demand
original quantity demanded
X 100 i.e.
40
200
X 100 = 20%
The percentage change in price is:
Change in price
original 𝒑𝒓𝒊𝒄𝒆
X 100 i.e.
−$1
$10
X 100 = -10%
When these changes have been calculated, the percentage changes in quantity
demanded is divided by percentage changes in price to give the PED. In this
case, this is
20%
−10%
. Hence the PED is -2.
Unit 2.7: Price elasticity of demand (PED)

6. Interpretation of PED
The PED figure provides two pieces of information.
• One is given by sign, this tells us that there is an inverse relationship
between the quantity demanded and price.
• The other piece of information is provided by the size of the figure. A
figure of -2 of PED, for example, indicates that a 1% change in price will
cause a 2% change in quantity demanded.
Elastic and inelastic demand
• Elastic demand:
When the quantity demanded changes by a greater percentage
than the change in price
• Inelastic demand:
When the quantity demanded changes by a smaller percentage
than the change in price
Unit 2.7: Price elasticity of demand (PED)

7. Elastic demand:
In this case, the percentage change in quantity demanded is:
200
300
X 100 = 66.67% and the
percentage change in price is:
−$20
$80
X 100 = -25% . Hence, PED =
66.67%
−25%
= -2.67
This means, a change in price makes a higher change in quantity demanded. These products
have a price elastic demand. The value of PED is greater than 1.
Unit 2.7: Price elasticity of demand (PED)

8. Inelastic demand:
In this case, the percentage change in quantity demanded is 5% and the percentage change in price is -10 %.
Hence, PED =
5%
−10%
= - 0.5
When the % change in quantity demanded is lesser than the % change in price, it is said to have a price inelastic
demand. Their values are always below 1. A change in price makes a smaller change in demand.
Unit 2.7: Price elasticity of demand (PED)

9. Activity –1 Calculating PED (3 minutes)
Assume that there are two products called product A and product B. Both products are
unrelated and are currently priced at AED 100 and demand for them is 1000 units per
month. Consider what might happen to the demand for A and B if the price rises to AED 105.
The quantity demanded of product A only falls from 1000 to 990, whereas the quantity
demanded of product B falls from 1000 to 900.
• Calculate the percentage change in quantity demanded & the percentage change in
price for goods A & B. By putting these values into the PED equation, we can calculate
the PED.
Product A =
% Δ in 𝑄𝐷
% Δ in P
= (-) 0.2
Product B =
% Δ in 𝑄𝐷
% Δ in P
= (-) 2.0
Unit 2.7: Price elasticity of demand (PED)

10. Unit 2.7: Price elasticity of demand (PED)

11. Other degrees of elasticity
1. Perfectly inelastic demand: When a change in price has no
effect on quantity demanded. In this case, PED is 0.
2. Perfectly elastic demand: When a change in price causes a
complete change in the quantity demanded. A firm can sell any
quantity at the going market price but nothing above this price. In this
case, PED is infinity and is represented by vertical straight line.
3. Unit elasticity of demand: When a change in price causes an
equal change in the quantity demanded. In this case, PED is unity.
Unit 2.7: Price elasticity of demand (PED)

12. Unit 2.7: Price elasticity of demand (PED)
Elasticity of Demand
Value
(ignoring
the sign)
Description
Perfectly Elastic Infinity The percentage change in the quantity demanded is infinite
Elastic > 1 The percentage change in QD is greater than the
percentage change in the variable
Unit Elastic = 1 The percentage change in the QD is equal to the percentage
change in the variable.
Inelastic < 1 The percentage change in the QD is less than the
percentage change in the variable
Perfectly Inelastic 0 There is no change in the QD

13. Determinants of price elasticity of demand
1. Availability of substitutes (Attestation services, Entry test fee, IELTS)
If a product has many substitute products it will have an elastic demand. For example, Coca-Cola has many
substitutes such as Pepsi and Mountain Dew. Thus a change in price will have a greater effect on its demand (If
price rises, consumers will quickly move to the substitutes and if price lowers, more consumers will buy Coca-Cola).
2. Proportion of income spend on commodity (Price of a flight vs. price of a bus trip into town)
Goods such as rice, water (necessities) will have an inelastic demand as a change in price won’t have any significant
effect on its demand, as it will only take up a very small proportion of their income. Luxury goods such as cars on
the other hand, will have a high price elastic demand as it takes up a huge proportion of consumers’ incomes.
3. Necessities versus luxuries
Luxury products usually have elastic demand. In contrast to luxuries, necessities tend to have inelastic demand.
4. Time period (Govt. regulated Electricity vs. Solar energy, rise in fee for urgent passport processing,
Airline fare)
Demand for a product is more likely to be elastic in the long run. For example, if the price rises, consumers will
search for cheaper substitutes.
5. Definition of market
The more narrowly defined a product is, the more elastic its demand. The narrower the definition, the more
substitute a product is likely to have.
Unit 2.7: Price elasticity of demand (PED)

14. Unit 2.7: Price elasticity of demand (PED)
PED and the total spending on a product and revenue gained
• If the product is found to have an elastic demand, the producer can lower prices to
increase revenue. The law of demand states that a price fall increases the demand.
And since it is an elastic product (change in demand is higher than change in price),
the demand of the product will increase highly. The producers get more revenue.
• If the product is found to have an inelastic demand, the producer can raise prices to
increase revenue. Since quantity demanded wouldn’t fall much as it is inelastic, the
high prices will make way for higher revenue and thus higher profits.
Activity 2– (3 minutes)
Price elasticity of a certain product is 2. Would you advise the seller of this product to increase
the selling price in order to increase his sales revenue? Justify your answer.

15. Price elasticity of supply (PES):
A measure of the responsiveness of the quantity supplied to a change in price.
PES =
Perentage change in quantity supplied
Perentage change in price
Calculating PES
• Calculate the percentage change in quantity supplied:
Change in quantity supplied
Original quantity supplied
X 100
• The percentage change in price is:
Change in price
Original price
X 100
Unit 2.8: Price elasticity of supply (PES)

16. Numerical example for calculating PES:
PES =
Perentage change in quantity supplied
Perentage change in price
For example, the quantity supplied may rise from 100 to 130 as a result of price
increasing from $10 to $12. In this case the percentage change in quantity
supplied is:
Change in supplied
Original quantity supplied
X 100 i.e.
30
100
X 100 = 30%
The percentage change in price is:
Change in price
Original price
X 100 i.e.
$2
$10
X 100 = 20%
When these changes have been calculated, the percentage changes in quantity
supplied is divided by percentage changes in price to give the PES. In this case,
this is
30%
20%
. Hence the PES is 1.5.
Unit 2.8: Price elasticity of supply (PES)

17. Interpretation of PES
The PES is a positive figure as the quantity supplied and price are directly related.
The higher the figure, the more responsive the supply is. A PES of 1.5, for example,
means that a 1% rise in rice will cause a 1.5% change in quantity supplied.
Elastic and inelastic supply
Elastic supply is when the percentage change in quantity supplied is greater than the
percentage change in price.
In contrast, inelastic supply is when the percentage change in quantity supplied is
less than the percentage change in price.
Unit 2.8: Price elasticity of supply (PES)

18. Activity 3 (5 minutes) - Quick Assessment- PED & PES
1. The price of bread rose by 5% and quantity demanded fell by 4%.
What was the price elasticity of demand for bread?
A -0.4 B -0.8 C -1.25 D -2.0
2. In response to an increase in price from AED 5 per kilo to AED 6 per kilo, a
farmer increased supply from 400 kilos to 500 kilos per week.
What is the price elasticity of supply?
A 0.8 B 0.9 C 1.2 D 1.25
3. In each case, calculate the PES:
a. A fall in price from $5 to $4 causes supply to contract from 10,000 to 4,000.
b. Supply extends from 200 to 210 when price rises from $10 to $14.

19. Student Feedback/ Checklist: The RAG rating is below
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20. Summary & Self Evaluation Checklist
:
Unit 2.7 & 2.8 : PED & PES
Student should be able to
Student’s
Understanding
(RAG Rating)
Comment
Understand the concept of elasticity and the difference
between elastic and inelastic demand
Describe and calculate PED, YED, XED & PES.
Explain the factors affecting PED
draw and interpret demand curves to show different
PED
Explain the relationship between PED and total
spending on a product, and the revenue gained

21. Command Words
The command word will relate to the subject context.
Command word What it means
Define Give precise meaning
Calculate Work out from given facts, figures or information
Describe State the points of a topic/ give characteristics and
main features
Identify Name/select/recognise
Analyse Examine in detail to show meaning, identify
elements and the relationship between them
Discuss Write about issue or topic in depth in a structured
way

22. Home Work- Price Elasticity of Demand and Supply
Activity –4 (15 minutes)
a.) The price of packet of Salt has increased and as a result the quantity of demand has fallen as
follows.
Price per packet Quantity of demand
6 200
9 160
Calculate its PED and explain the changes in sales revenue.
b.) The price of Banana per KG has increased from $20 to $22 and its quantity demanded has fallen
from 400 units to 300 units.
Calculate its PED and explain the changes in sales revenue.

23. Elasticity of Demand and Supply
Thank You & Good Day!
Feel free to contact me in case you have any queries:
Yousaf Dar
Mob: +971-55-3310969, +971-54-2897487
Email: yousafasghar1987@gmail.com
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