1What PED Actually Means

The law of demand tells you the direction: if price goes up, quantity demanded goes down. But it doesn't tell you . That's the gap PED fills.

Think of two products: cigarettes and a specific brand of orange juice. If both go up in price by 10%, will people cut back the same amount? No — smokers are addicted, so they barely reduce their purchases. Orange juice buyers, on the other hand, can easily switch to a different brand or apple juice instead, so their quantity demanded drops a lot more. PED is the number that captures this difference in "sensitivity."

2Interpreting PED Values — the Full Spectrum

PED can be anywhere from 0 to infinity. Where a product sits on this scale tells you a completely different story about consumer behaviour:

3What Determines PED?

Why is one product's PED high and another's low? Four main factors:

• Availability of substitutes — lots of close substitutes → consumers can switch easily → higher PED (elastic).
• Addictiveness — addictive products behave like necessities → consumers keep buying regardless of price → lower PED (inelastic).
• Price as a proportion of income — cheap items (a chocolate bar) barely register on your budget even if the price rises → lower PED. Expensive items (a car) hurt your wallet noticeably → higher PED.
• Time period — in the , people are stuck with habits and existing contracts, so demand is inelastic. Given more , people find substitutes and adjust, so demand becomes more elastic.

4PED and Total Revenue — the Big Payoff

This is where PED stops being an abstract number and becomes a genuine business decision tool. Total Revenue = Price × Quantity. When a firm changes price, quantity moves in the opposite direction — but PED tells you which effect "wins."

Why does this work? Walk through the logic:

• If demand is elastic and you raise price, quantity demanded falls by than proportionally — you lose more in volume than you gain in price, so total revenue falls. Instead, if you cut price, quantity demanded rises by more than proportionally, and revenue rises.
• If demand is inelastic and you raise price, quantity demanded only falls a little — you gain more from the higher price per unit than you lose from slightly fewer sales, so total revenue rises.

5Why PED Matters to Real Stakeholders

For firms: knowing PED lets a business set prices strategically — raise prices on inelastic products, cut prices (or use price discrimination) on elastic ones, all to maximise revenue.

For governments:

• They tax inelastic products (like cigarettes, fuel) because consumers keep buying almost the same amount — this raises tax revenue reliably without crushing sales, and firms can pass the tax on to consumers without losing many customers.
• They subsidise elastic products because a subsidy (which lowers price) causes a rise in demand — a small subsidy goes a long way.

1What PES Means

Same logic as PED, but flip your perspective from to . The law of supply says: price up → quantity supplied up. PES measures .

2Interpreting PES Values

3What Determines PES?

• Mobility of factors of production — if a firm can quickly redirect labour, land or machinery towards a different product, supply responds fast → elastic. A shoe factory switching from trainers to boots is easy; a wheat farmer switching to barley mid-season is not.
• Ability to store goods — storable goods (tinned food) let producers release stock the moment price rises → elastic. Perishable goods (fresh fruit) can't be stockpiled → inelastic.
• Spare capacity — if factories are running under capacity, they can ramp up output fast → elastic. If already running flat out, they can't respond → inelastic.
• Time period — in the , producers are stuck with current resources (can't grow a crop overnight) → inelastic. In the , they can build new factories, plant new crops, hire more staff → elastic.

4Primary Commodities vs Manufactured Goods

This is a classic exam comparison: why do raw materials/crops (primary commodities) almost always have lower PES than manufactured products?

Overall: Primary commodities → PES typically 0–1 (inelastic). Manufactured goods → PES typically >1 (elastic).

5Why PES Matters to Real Stakeholders

• High PES (elastic) firms respond to price rises quickly → more revenue and profit opportunity. Firms can their PES by holding spare capacity, keeping larger inventories, or investing in modern technology.
• Low PES (inelastic) firms can't respond to rising demand → shortages persist → prices keep climbing → risk of inflation.
• Governments care about PES in key markets: e.g. if housing supply is inelastic, rising demand just pushes prices up rather than getting more homes built — a major real-world policy problem. Similarly, an inelastic labour market means firms' costs rise quickly whenever they need to hire during a boom.

1What YED Means

PED and PES both look at . YED changes the variable — it asks: when consumer income changes, how does quantity demanded respond?

2Interpreting YED Values — The Sign Is Everything

3Why YED Matters to Real Stakeholders

For businesses:

• During economic growth (rising incomes): normal-good businesses expect rising demand; inferior-good businesses expect falling demand.
• During a recession (falling incomes): inferior-good businesses can actually expect demand to .
• Knowing YED lets a business predict future sales and plan whether to expand, contract, or diversify production — protecting or maximising total revenue through the economic cycle.

For governments:

• YED helps predict how consumer spending patterns will shift with income changes — useful for reducing inequality (e.g. cutting taxes for low earners to boost their spending on necessities like healthcare and education).
• Governments may prefer to tax goods with low YED (necessities) because demand — and therefore tax revenue — stays stable even during a recession when incomes fall.

 What Examiners Reward

• Showing full working for calculations — the % change formula, then the elasticity formula, then a clear final value.
• Using the correct terminology: "relatively elastic/inelastic," "unitary," "perfectly elastic/inelastic" — not vague words like "sensitive" or "flexible."
• Linking a calculated value back to a real-world reason (e.g. "PES is low because avocados take time to grow" — not just stating the number).
• For evaluation questions, considering multiple stakeholders or viewpoints (firm vs consumer vs government) rather than a one-sided answer.