Introduction to Price Elasticity of Demand Revision Notes | GCSE AQA Economics

1. Why Price Changes Do Not Always Work the Way You Expect

Imagine a supermarket raises the price of petrol by 20%. Sales barely move. The same supermarket raises the price of its own-brand biscuits by 20%. Sales collapse. Same price change — completely different outcomes. That gap is what price elasticity of demand explains.

This is one of the most tested concepts on AQA Paper 1. Firms use it to set prices, governments use it to design taxes, and examiners use it to separate students who have memorised a formula from those who actually understand markets.

2. Defining Price Elasticity of Demand

The word responsiveness is doing the heavy lifting in that definition. PED tells you: for every 1% change in price, by what percentage does quantity demanded change? A large response means demand is sensitive to price. A small response means consumers keep buying regardless.

PED almost always produces a negative number, because price and quantity demanded move in opposite directions — when price rises, quantity demanded falls. In practice, AQA questions often ask you to state the value and then interpret it, so knowing whether the absolute value is above or below 1 is what matters most.

3. Elastic vs Inelastic: The Core Distinction

Once you have calculated a PED value, you need to interpret it. The key boundary is 1 (ignoring the negative sign). Whether the absolute value sits above or below 1 tells you which side of the elastic/inelastic divide you are on.

For AQA GCSE, you need to be confident with elastic (PED greater than 1) and inelastic (PED less than 1). The perfectly elastic and perfectly inelastic cases are useful context, but the exam focuses on the two main categories.

Think about luxury goods or products with many close substitutes. If the price of one brand of cola rises, consumers switch to another brand without much hesitation. The percentage fall in quantity demanded is larger than the percentage rise in price — that is elastic demand in action.

Necessities with few or no substitutes tend to be price inelastic. Petrol is a strong example: even when prices rise sharply, most drivers still fill up because they need to get to work. The percentage fall in quantity demanded is smaller than the percentage rise in price.

4. Calculating PED: Step-by-Step

Knowing the formula is only half the job. Exam questions give you prices and quantities, not percentage changes — so you need to calculate those first. Here is the method that earns method marks every time.

Worked example: Calculating PED from Price and Quantity Data

The price of a train ticket rises from £20 to £25. As a result, the number of journeys demanded falls from 1,000 per day to 800 per day. Calculate the PED and state whether demand is elastic or inelastic.

1. $\% \Delta P = \frac{25 - 20}{20} \times 100 = \frac{5}{20} \times 100 = 25\%$ — New price minus original price, divided by original price, multiplied by 100. The original price is always the denominator.
2. $\% \Delta Q_d = \frac{800 - 1000}{1000} \times 100 = \frac{-200}{1000} \times 100 = -20\%$ — New quantity minus original quantity, divided by original quantity, multiplied by 100. The negative sign shows quantity fell.
3. $PED = \frac{-20\%}{+25\%} = -0.8$ — Divide the percentage change in quantity demanded by the percentage change in price. The result is negative, which is normal.
4. Absolute value of PED = 0.8, which is less than 1. — Because the absolute value is less than 1, demand is price inelastic. The 25% price rise caused only a 20% fall in quantity demanded — consumers are not very responsive to this price change.

Answer: PED = -0.8. Demand is price inelastic because the absolute value (0.8) is less than 1. The percentage fall in quantity demanded (20%) is smaller than the percentage rise in price (25%).

Notice that the price change and the quantity change are not equivalent — a 25% price rise caused only a 20% fall in demand. That is exactly what specification requirement 2 is pointing at: changes in price do not always cause equivalent changes in demand. The PED value tells you precisely how unequal that relationship is.

5. Why Demand Is Not Always Equivalent to Price Changes

The reason a price change and a quantity change are rarely equivalent comes down to the nature of the good and the choices available to consumers. Several factors determine how sensitive demand is to price.

• Availability of substitutes: the more close substitutes exist, the more elastic demand tends to be, because consumers can switch easily when price rises.
• Whether the good is a necessity or a luxury: necessities (food, medicine, fuel) tend to be inelastic because consumers cannot easily go without them.
• Proportion of income spent: goods that take up a large share of income (e.g. rent) tend to be more elastic, as consumers notice and respond to price changes more.
• Time period: demand tends to become more elastic over time, as consumers find alternatives or change habits.

These factors explain why the same percentage price rise can produce a tiny fall in demand for one good and a large fall for another. A 10% rise in the price of a life-saving drug barely shifts demand at all. A 10% rise in the price of a specific streaming service might cause a significant number of subscribers to cancel.

6. Real-World Application: PED in Practice

PED is not just a formula to memorise — it shapes real decisions. When a firm knows its demand is inelastic, raising price increases revenue because the fall in quantity sold is proportionally smaller than the rise in price. When demand is elastic, raising price cuts revenue because consumers switch away in large numbers.

Consider the UK government's tobacco duty. Cigarettes have a PED estimated well below 1 — demand is highly inelastic because of addiction and few substitutes. A 10% tax-driven price rise causes only a small fall in quantity demanded, so tax revenue rises significantly. The government exploits inelastic demand to raise revenue while also discouraging consumption, though the quantity effect is limited precisely because demand is inelastic.

Contrast this with budget airlines. Demand for a specific low-cost route is highly elastic — passengers can choose different airlines, travel by train, or not travel at all. A 10% fare rise on that route could cause a much larger percentage fall in bookings, reducing total revenue. Airlines therefore compete aggressively on price and use dynamic pricing to fill seats rather than risk large demand losses.

7. Exam Technique: How to Get Full Marks on PED Questions

AQA Paper 1 tests PED in several ways: a straight calculation, an interpretation question, or an extended explain/analyse question asking you to apply PED to a market scenario. Each type has a method that maximises marks.

For a 4-mark 'Explain' question on PED, the AQA mark scheme rewards a clear definition, a correct chain of analysis, and a link to the outcome. A strong answer might read: 'PED measures the responsiveness of quantity demanded to a change in price. Because demand for petrol is price inelastic (PED less than 1), a 20% rise in price leads to a proportionally smaller fall in quantity demanded. Consumers continue to buy petrol because there are few substitutes, so the firm's total revenue rises.'

PED sits at the heart of how markets work: it explains why identical price changes produce very different quantity responses across different goods, and it gives firms and governments a precise tool for predicting those responses. Mastering the formula, the elastic/inelastic distinction, and the chain-of-analysis structure covers all three specification requirements for this topic.