PED view. The left diagram is a demand curve (D). Drag the dot, or use the Price slider, to choose a price P1. The shaded rectangle is total revenue: its height is the price and its width the quantity demanded, so its area is TR = P × Q. The right diagram plots that TR against quantity, so the dot moves along the TR curve as you move along D.
On a straight-line demand curve, PED is not the slope, and it changes all the way along. Point PED is (ΔQ ÷ ΔP) × (P ÷ Q), which here comes to −P ÷ (100 − P):
- above the midpoint, |PED| > 1 (elastic): a price cut raises TR, a rise lowers it;
- at the midpoint, |PED| = 1 (unit elastic): TR is at its maximum;
- below the midpoint, |PED| < 1 (inelastic): a price rise raises TR, a cut lowers it.
So the TR curve rises over the elastic range, peaks at the midpoint and falls over the inelastic range. The Demand curve slider makes the line steeper or flatter: every price keeps the same PED, and the midpoint is always where TR peaks.
A price change. The Price change slider moves the price from P1 to P2. In green is the revenue gained, in red the revenue lost: after a rise, the gain is the extra price on the units still sold and the loss is the sales that go. The working uses the Cambridge formula:
- PED = % change in quantity demanded ÷ % change in price
- each percentage change = (new value − original value) ÷ original value × 100, so the base is the starting price and quantity, P1 and Q1.
The midpoint method (dividing by the average of the old and new values) is shown alongside for comparison. Because each percentage depends on its base, a large change across the midpoint can come out "inelastic" while TR still falls. Near the midpoint, use a small change.
Special cases (the buttons):
- perfectly inelastic demand is vertical (PED = 0): TR rises in proportion to the price;
- perfectly elastic demand is horizontal (PED = −∞): any rise loses every sale;
- unit elastic demand is a rectangular hyperbola (P × Q is the same everywhere, PED = −1): TR does not change.
PES view. PES = % change in quantity supplied ÷ % change in price. For a straight supply curve:
- through the origin: PES = 1 at every point, whatever its slope;
- cutting the price axis: PES > 1 (elastic);
- cutting the quantity axis: PES < 1 (inelastic);
- horizontal: perfectly elastic; vertical: perfectly inelastic.
The time period buttons show supply becoming more elastic over time:
- the momentary period: the stock is fixed, so supply is vertical;
- the short run: firms can use spare capacity and overtime, but some factors are fixed;
- the long run: all factors can change and new firms can enter.
The Demand shift slider moves demand from D1 to D2. The bars compare the percentage change in price and in quantity for each kind of supply: the less elastic supply is, the more of the change is in price; the more elastic, the more is in quantity.
Common exam mistakes
- Calling a steep demand curve "inelastic" everywhere: a straight line has every elasticity along it. Only the special cases have one PED throughout.
- Putting price on top: PED is % change in quantity ÷ % change in price.
- Using the new value as the base of a percentage change, or using the change in units instead of the percentage.
- Saying a price rise always raises revenue: it does only where demand is inelastic.
- Drawing a unit elastic demand curve as a straight 45° line: it is a curve, a rectangular hyperbola. (For supply, any straight line through the origin is unit elastic.)
Objective: Cambridge IGCSE Economics (0455): price elasticity of demand and supply, and the link between PED and total revenue. Cambridge International AS Level Economics (9708): price elasticity of demand and supply, their determinants (including time), and PED and total revenue.
Where this fits
- AP: AP Microeconomics
- AQA: AQA A Level Business (7132); AQA A Level Economics (7136)
- Cambridge: Cambridge IGCSE Economics (0455); Cambridge A Level Business (9609); Cambridge AS Level Business (9609); Cambridge A Level Economics (9708); Cambridge AS Level Economics (9708)
- IB: IB Economics HL; IB Economics SL
- NCEA Level 3 Economics: 91401 Demonstrate understanding of micro-economic concepts
- Pearson Edexcel International: Edexcel International GCSE Economics (4EC1); Edexcel International A Level Business; Edexcel International A Level Economics
- USDP: USDP Economics
