A price elasticity worked example is not merely a calculation exercise. In an A-Level Economics examination, it tests whether you can move from data to economic meaning: calculate PED correctly, classify the result, explain consumer behavior, and evaluate the implications for firms and government policy.
Many students lose marks because they stop after obtaining a number. A high-quality response shows what that number means for revenue, pricing decisions, and the availability of substitutes. This is where disciplined exam technique makes the difference.
What Price Elasticity of Demand Measures
Price elasticity of demand, or PED, measures how responsive quantity demanded is to a change in price. The formula is:
PED = percentage change in quantity demanded ÷ percentage change in price
Because price and quantity demanded usually move in opposite directions, PED normally has a negative sign. In most A-Level answers, however, economists discuss the absolute value. For example, a PED of -1.5 is described as price elastic because its absolute value is greater than 1.
The classifications are straightforward. Demand is price elastic when PED is greater than 1 in absolute terms, price inelastic when it is less than 1, unit elastic when it equals 1, and perfectly inelastic or perfectly elastic only in special theoretical cases.
The calculation matters, but the interpretation earns the analytical marks. If demand is elastic, consumers are highly responsive to price changes. If it is inelastic, quantity demanded changes by a smaller percentage than price.
Price Elasticity Worked Example: Calculate PED Step by Step
Assume a coffee shop raises the price of a specialty coffee from $10 to $12. Following the price increase, weekly quantity demanded falls from 600 cups to 420 cups.
First, calculate the percentage change in quantity demanded:
Percentage change in quantity demanded = (420 – 600) ÷ 600 × 100
= -30%
Next, calculate the percentage change in price:
Percentage change in price = (12 – 10) ÷ 10 × 100
= +20%
Now apply the PED formula:
PED = -30% ÷ +20% = -1.5
The PED is -1.5. Since the absolute value is greater than 1, demand for the specialty coffee is price elastic.
A complete exam statement would read: “The PED for specialty coffee is -1.5, indicating price-elastic demand. A 1% increase in price leads to a 1.5% decrease in quantity demanded, ceteris paribus.”
That final phrase matters. PED assumes that other determinants of demand, such as consumer income, tastes, advertising, and the prices of substitutes, remain unchanged. In real markets, several factors may change at the same time. In an examination, state the assumption when it strengthens your analysis, especially if the data may not isolate the effect of price alone.
What Happens to Total Revenue?
This example becomes more valuable when you extend it to total revenue. Total revenue equals price multiplied by quantity sold.
Before the price increase, total revenue was $10 × 600 = $6,000. After the price increase, it becomes $12 × 420 = $5,040.
Although the firm charges more per cup, total revenue falls by $960. This is consistent with elastic demand: the percentage fall in quantity demanded is greater than the percentage increase in price.
The relationship is worth memorizing, but it must be applied carefully. When demand is elastic, a price increase reduces total revenue, while a price decrease raises total revenue. When demand is inelastic, a price increase raises total revenue, while a price decrease reduces it. With unit-elastic demand, total revenue remains unchanged in percentage terms.
For firms, this has direct strategic importance. A business selling a product with elastic demand must be cautious about raising prices, particularly if consumers can switch easily to competing brands. Yet a firm may still raise prices if production costs have risen significantly or if it prioritizes profit margin over sales volume. PED informs the decision; it does not make the decision by itself.
Why Was Demand Price Elastic?
A strong answer should not treat the PED figure as self-explanatory. Explain the likely determinants behind it.
Specialty coffee may have close substitutes. Consumers can choose another café, make coffee at home, buy instant coffee, or select a different beverage. The greater the number and closeness of substitutes, the easier it is for consumers to switch after a price increase.
The product may also be a non-necessity. While coffee can be a routine purchase for some consumers, a premium specialty coffee is more discretionary than essential items such as basic food, utilities, or medical treatment. Demand for luxury or discretionary products tends to be more elastic.
The proportion of income spent is another useful explanation. A single coffee purchase may account for a small proportion of income, which could make demand relatively inelastic. However, frequent purchases add up. For students or budget-conscious consumers, a sustained increase in coffee prices may encourage a switch to cheaper alternatives. This is a useful reminder that PED depends on the specific consumer group and time period.
Time is especially important. In the short run, regular customers may continue purchasing because of habit or convenience. In the long run, they have more opportunity to find alternatives, change routines, or purchase home equipment. Demand may therefore become more elastic over time.
How to Write This in an A-Level Answer
When a question provides price and quantity data, use a clear sequence rather than presenting a calculation without explanation. First, show both percentage changes. Second, state the PED formula and substitute the figures. Third, classify demand accurately. Finally, connect the result to the question, whether it concerns revenue, a firm’s pricing strategy, an indirect tax, or consumer welfare.
For example, if the government imposes an indirect tax that raises the price of a product with elastic demand, quantity demanded may fall by a relatively large amount. This could reduce consumption substantially, which may be desirable for demerit goods such as sugary drinks. However, tax revenue may not rise as much as expected if consumers switch to alternatives. The final outcome depends on the size of the tax, the availability of substitutes, and the price elasticity of supply as well as demand.
Avoid a common error: do not say “demand falls” when price rises. A price change causes a movement along the demand curve, shown as a contraction or extension in quantity demanded. Demand itself changes only when a non-price determinant shifts the entire curve. Precise terminology signals sound conceptual control.
Common Calculation Errors to Avoid
Students should be particularly careful with the base value used in percentage-change calculations. If quantity falls from 600 to 420, divide the change of -180 by the original quantity of 600. Similarly, divide the $2 price increase by the original price of $10.
Also keep the sign until you have interpreted the result. A negative PED is normal because of the law of demand. Do not conclude that demand is inelastic simply because the answer is negative. Look at the absolute value: -1.5 is elastic, while -0.4 is inelastic.
Finally, do not confuse a large fall in quantity with elastic demand automatically. Elasticity is based on percentage changes, not absolute changes. A fall of 100 units could be large or small depending on the original quantity sold.
Turning Calculation Into Higher-Level Analysis
The best responses go beyond the mechanical result. If PED is elastic, consider the firm’s ability to pass higher costs to consumers. If PED is inelastic, assess whether raising price might increase revenue but damage customer goodwill, brand loyalty, or long-run market share. For government policy, consider whether the good has substitutes and whether lower-income households may be disproportionately affected.
The numerical answer provides the starting point. The evaluation comes from recognizing that elasticity can vary between market segments, across time, and according to how narrowly the product is defined. A broad category such as “coffee” may be relatively inelastic, while “one premium coffee brand near a transit station” may be far more elastic.
Practice each price elasticity worked example as an exercise in economic judgment, not just arithmetic. At A Level Economics, the students who consistently achieve stronger results are those who can calculate with accuracy, explain with precision, and apply each figure to the context given.