Price Elasticity

What is Price Elasticity?

Within Economics & Civics, which covers money, markets, business, government, law and citizenship: how societies are organised and run, this topic explains Price Elasticity. Economics and civics topics explain how money, markets, laws and government affect people, so each topic here pairs a clear definition with a model.

Check that you can explain Price Elasticity in your own words and give one example from everyday life. If you can do that, you have understood the core idea.

Understanding Price Elasticity helps you read the news critically and weigh up policies, choices and arguments about society.

Price Elasticity in detail

Price elasticity of demand (PED) measures how much the quantity demanded changes when price changes: PED = % change in quantity demanded ÷ % change in price. If PED is greater than 1, demand is elastic, as buyers are sensitive to price. If it is less than 1, demand is inelastic, and buyers are less responsive.

Necessities such as salt and petrol tend to be inelastic, while luxuries with many substitutes are elastic. Elasticity affects revenue: a firm raising price of an inelastic product increases revenue, but for an elastic product, it falls. Governments consider elasticity when taxing goods like cigarettes. Price elasticity of supply also exists.

How the interactive helps you understand Price Elasticity

Watch the supply model in the interactive. Use any sliders or buttons it offers to change the values and see how the supply model responds.

Before you change anything, predict the result. Then change one value at a time and check whether your prediction was right. This is a quick way to build a correct mental model of Price Elasticity.

Real-life uses and examples

• Use Price Elasticity to weigh up the pros and costs of a policy or decision.
• Explain Price Elasticity to a classmate using a choice you make yourself, such as spending pocket money.
• Give a balanced answer about Price Elasticity by considering more than one point of view.

Common mistakes to avoid

• Confusing a short-term effect with a long-term one.
• Giving an opinion without evidence or a clear economic or civic reason.
• Learning the definition without testing it. Use the quiz and the interactive to check that you can apply the idea.