Topics: Microeconomics | Elasticities | Demand & Supply
Level: JC A-Level Economics / IB Economics
Price Elasticity is the measure of responsiveness. It answers the question: “If I change the price, how much will the quantity demanded or supplied change?”
These concepts are used everywhere in Economics—from understanding tax burdens to analyzing business strategies.
Watch the video explanation with the accompanying notes below:
1. Definitions & Formulas
Price Elasticity of Demand (PED)
Measures the responsiveness of quantity demanded to a change in price.
Price Elasticity of Supply (PES)
Measures the responsiveness of quantity supplied to a change in price.
2. Interpreting the Values: Elastic vs. Inelastic
The “Slope” of the curve tells you the elasticity at a glance.
| Type | Value | Interpretation | Curve Shape |
|---|---|---|---|
| Elastic | > 1 | Responsive. A small price change leads to a huge change in quantity. | Gentle / Flat Slope |
| Inelastic | < 1 | Unresponsive. A price change leads to very little change in quantity. | Steep Slope |
Note:
- PED is technically negative (inverse relationship), but we use the absolute value (magnitude) for comparison.
- PES is always positive (direct relationship).
3. Determinants of PED (Demand)
What makes consumers sensitive (Elastic) or insensitive (Inelastic) to price changes?
| Determinant | Elastic (PED > 1) | Inelastic (PED < 1) |
|---|---|---|
| Substitutes | Many / Close Substitutes. (e.g., Coca-Cola). If Coke price rises, you switch to Pepsi. | Few / Weak Substitutes. Consumers have no choice. |
| Proportion of Income | Large Proportion. (e.g., Car). A 10% rise is expensive; you will react strongly. | Small Proportion. (e.g., Salt). A 10% rise is negligible; you won’t care. |
| Nature of Good | Luxury. (e.g., Jewelry). You don’t need it. | Necessity. (e.g., Rice, Medicine). You buy it regardless of price. |
| Addiction | Not Addictive. | Habit Forming. (e.g., Cigarettes, Alcohol). Hard to cut back even if price rises. |
| Definition of Good | Narrow Definition. (e.g., “Roti Prata”). Many substitutes exist (Chicken Rice, Noodles). | Broad Definition. (e.g., “Food”). There is no substitute for food in general. |
| Time Horizon | Long Run. Consumers have time to find substitutes/change habits. | Short Run. Immediate reaction is limited. |
4. Determinants of PES (Supply)
What determines how easily a firm can ramp up production?
| Determinant | Elastic (PES > 1) | Inelastic (PES < 1) |
|---|---|---|
| Spare Capacity | High Spare Capacity. Machines/workers are idle and can start work immediately. | Full Capacity. No resources left to increase production quickly. |
| Factor Mobility | High Mobility. Resources can switch easily (e.g., Retail staff → to F&B). | Low Mobility. Specialized skills/machines needed (e.g., Mechanic cannot act as a Nurse). |
| Time Period | Long Run. Firms can build new factories. | Short Run. (e.g., Agriculture). Crops take months to grow; supply cannot change overnight. |
| Ease of Storing Stocks | Storable. (e.g., Canned food). Can release inventory when prices rise. | Perishable. (e.g., Fresh fish). Cannot store stocks; must sell immediately. |
| Number of Firms | Many Firms. High total market capacity. | Few Firms. Limited capacity. |
5. Extreme Cases
[Image of perfectly elastic and perfectly inelastic demand curves]- Perfectly Inelastic (0): Vertical line. Quantity is fixed regardless of price (e.g., A fixed quota or life-saving drug with no substitute).
- Perfectly Elastic (infinity): Horizontal line. Any price increase causes quantity to drop to zero (Perfect Competition).
Memorizing these determinants can be tough. In our tuition classes, we use unique Economics Songs to help these concepts stick in your memory forever. Check out the PED song and PES song.
Part 2 of this series (Applications of Elasticity) is exclusively available to our students.
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(For more details on Elasticities, check out our dedicated Elasticities Notes. For other topics, browse our full Economics Notes Library.)