Factors Affecting and Measuring PED Revision Notes | GCSE AQA Economics

1. Why PED Matters

Imagine you run a coffee shop. You raise your prices by 10%. Do customers keep buying, or do they walk next door? The answer depends on price elasticity of demand — and it determines whether that price rise earns you more money or loses you sales.

PED tells businesses, governments, and economists how sensitive consumers are to price changes. Get this wrong and a firm could raise prices expecting more revenue, only to find customers disappear. Understanding PED is central to AQA Paper 1 and appears in calculation, explanation, and evaluation questions.

2. The PED Formula

PED has one formula, and you need to know it precisely. The specification states it as the percentage change in quantity demanded divided by the percentage change in price.

To find each percentage change, use: $\% \Delta = \frac{\text{new} - \text{old}}{\text{old}} \times 100$. You will almost always get a negative PED value, because price and quantity demanded move in opposite directions — when price rises, quantity demanded falls. AQA expects you to recognise this negative relationship, but in most interpretations you work with the absolute (positive) value.

Worked example: Calculating PED from Given Data

A cinema charges £8 per ticket and sells 500 tickets per week. It raises the price to £10. Ticket sales fall to 400 per week. Calculate the PED.

1. $\% \Delta P = \frac{10 - 8}{8} \times 100 = \frac{2}{8} \times 100 = 25\%$ — New price minus old price, divided by old price, multiplied by 100. Price has risen by 25%.
2. $\% \Delta Q_d = \frac{400 - 500}{500} \times 100 = \frac{-100}{500} \times 100 = -20\%$ — New quantity minus old quantity, divided by old quantity, multiplied by 100. Quantity demanded has fallen by 20%. The negative sign reflects the law of demand.
3. $PED = \frac{-20\%}{25\%} = -0.8$ — Divide the percentage change in quantity demanded by the percentage change in price.
4. $|PED| = 0.8 < 1$ — The absolute value is less than 1, so demand is inelastic. A 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.

3. Interpreting PED Values

Once you have a PED value, you need to classify it. The boundary is always 1 (using the absolute value). A value above 1 means elastic demand; below 1 means inelastic demand; exactly 1 is unit elastic.

A useful anchor: think of insulin for a diabetic patient. No matter how much the price rises, the patient still needs the same dose. That is perfectly inelastic demand. At the other extreme, if a market stall raises the price of one brand of bottled water by 1p while identical brands sit next to it, buyers switch immediately — highly elastic demand.

4. Factors Affecting PED

Knowing how to calculate PED is only half the picture. The specification also requires you to explain what determines whether demand is elastic or inelastic in the first place. There are four main factors to know.

Consider petrol versus a specific brand of cola. Petrol has few close substitutes — most drivers cannot switch to another fuel at short notice — so demand is relatively inelastic. A particular brand of cola, however, faces dozens of rival drinks, so demand is more elastic. The more substitutes, the higher the PED.

This connects directly to the substitutes point. Necessities often have few substitutes and are hard to go without, reinforcing inelastic demand. Luxuries can be postponed or replaced, reinforcing elastic demand.

A good example of the time factor is energy. When gas prices rise sharply, households cannot immediately switch to a different heating system — demand is inelastic in the short run. Over several years, however, households may install heat pumps or improve insulation, reducing their gas consumption significantly — demand becomes more elastic in the long run.

5. PED and Total Revenue

PED has a direct and important link to a firm's total revenue. Total revenue is price multiplied by quantity sold. Whether a price change increases or decreases total revenue depends entirely on whether demand is elastic or inelastic.

When demand is inelastic (PED less than 1), raising the price increases total revenue. The percentage rise in price is larger than the percentage fall in quantity, so the firm earns more overall. When demand is elastic (PED greater than 1), raising the price reduces total revenue, because the percentage fall in quantity is larger than the percentage rise in price.

Worked example: Checking the Total Revenue Effect of a Price Change

A supermarket sells 2,000 loaves of bread per week at £1.20 each. It raises the price to £1.50. Sales fall to 1,800 loaves. Calculate total revenue before and after, and explain the result using PED.

1. $TR_1 = 1.20 \times 2000 = £2400$ — Total revenue equals price multiplied by quantity sold.
2. $TR_2 = 1.50 \times 1800 = £2700$ — Price is now £1.50 and quantity sold is 1,800 loaves.
3. $\% \Delta P = \frac{1.50 - 1.20}{1.20} \times 100 = \frac{0.30}{1.20} \times 100 = 25\%$ $\% \Delta Q_d = \frac{1800 - 2000}{2000} \times 100 = \frac{-200}{2000} \times 100 = -10\%$ $PED = \frac{-10\%}{25\%} = -0.4$ — The absolute value of PED is 0.4, which is less than 1 — demand is inelastic.
4. $TR_2 - TR_1 = £2700 - £2400 = £300$ increase — Because demand is inelastic, the price rise increases total revenue. The 25% price rise outweighs the 10% fall in quantity, so the supermarket earns £300 more per week. This confirms the rule: inelastic demand + price rise = higher total revenue.

Answer: Total revenue rises from £2,400 to £2,700. PED = -0.4 (inelastic), confirming that a price rise increases total revenue when demand is inelastic.

6. Exam Technique and Common Mistakes

PED questions appear in several formats on AQA Paper 1: a one-mark definition, a calculation with data, an explanation of factors, or a longer analysis question linking PED to business decisions. Each format rewards a slightly different approach.

For calculation questions, always show the percentage change in quantity demanded and the percentage change in price as separate steps before dividing. Examiners award method marks for correct working even if the final answer contains an arithmetic slip. A bare answer with no working risks scoring zero if it is wrong.

Bringing it all together: PED is calculated using the percentage change in quantity demanded divided by the percentage change in price. The result tells you how responsive consumers are to price changes, and that responsiveness is shaped by factors including the availability of substitutes, whether the good is a necessity or luxury, the proportion of income spent on the good, and the time period under consideration. These factors, and the resulting PED value, directly determine what happens to a firm's total revenue when it changes its price.