Elasticity of demand: notes and practice questions
- This topic covers the responsiveness of quantity demanded to changes in price and income.
- Price elasticity of demand (PED) measures how quantity demanded changes with price: .
- PED determinants include availability of substitutes, necessity, proportion of income spent, and time.
- Total revenue changes depend on PED: if demand is elastic, price falls increase total revenue.
- Income elasticity of demand (YED) measures how quantity demanded changes with income: .
- Normal goods have positive YED; inferior goods have negative YED.
- Necessities have YED between 0 and 1; luxury goods have YED greater than 1.
How it is examined
Heavily examined at both levels. The May 2025 HL Paper 1 TZ1 Q1 used the HL-only primary commodity point as part (a) for 10 marks and the importance of PED for firms and government as part (b) for 15. The calculation appears in Paper 2 part (b) and throughout Paper 3. The mark scheme is strict: an inverted formula scores zero even if the arithmetic is right.
- PED = percentage change in quantity demanded / percentage change in price
- YED = percentage change in quantity demanded / percentage change in income
- The concept of elasticity. (AO1, AO4)
- Price elasticity of demand, defined as the percentage change in quantity demanded divided by the percentage change in price. (AO2, AO4)
- The degrees of PED, meaning the theoretical range of values. (AO2, AO4)
- The determinants of PED: the number and closeness of substitutes, the degree of necessity, the proportion of income spent on the good, and time. (AO2, AO4)
- Changing PED along a straight-line downward-sloping demand curve. (AO2, AO4)
- Reasons why PED for primary commodities is generally lower than PED for manufactured products. (AO2)
- The importance of YED for firms, and in explaining changes in the sectoral structure of the economy. (AO3)
Guiding questions
- How responsive is demand, and who needs to know?
Linking questions
- PES in 2.6 is the mirror image, with the same primary-commodity HL extension.
- PED drives the incidence of an indirect tax or subsidy in 2.7.
- The primary-commodity point (HL) explains commodity price volatility in 4.9.
- PED of exports and imports underlies the Marshall-Lerner condition in 4.6 (HL).
Practice questions
1 question · 1 hardQuestion 1
HardPaper 1 · no calculator25 marks(a) Explain why the price elasticity of demand (PED) for a good, such as gasoline (petrol), is likely to be lower in the short run than in the long run.
(b) Using real-world examples, discuss the view that a government's ability to influence consumer behaviour through indirect taxation is heavily dependent on the price elasticity of demand.
Think about the determinants of PED. Which determinant is most relevant when comparing different time periods? Consider how consumers can change their behaviour over time in response to a price change.
Consider the two main goals of an indirect tax on a demerit good: to raise government revenue and to reduce consumption. How does PED affect the success of each of these goals? Use examples like taxes on tobacco, alcohol, or sugary drinks.
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Where marks are lost
- No real-world example, or a stated one. An answer that names a country and stops cannot reach the top two bands.
- One-sided argument. Balance is an explicit axis. A student who argues only that a policy works is capped at 9 out of 15 on that axis alone.
- Diagram present but not explained. The diagram bullet escalates across three bands: included, included and explained, included and fully explained. A diagram dropped into an answer without prose that refers to it sits at 5 to 6 on a 10-mark part.
