Demand
"Demand for new first registered cars in the UK was up by 10% to 1.2 million units" [www.smmt.co.uk]
So, what affects the quantity bought of a product?
L7: Price Elasticity of Demand
Revision and practice on price elasticity of demand and how it affects pricing strategies.
Key vocabulary: Price Elasticity of Demand (PED), Elastic, Inelastic, Revenue
Key Concepts
Price Elasticity of Demand
PED = how a price increase/decrease affects the quantity demanded of a product.
PED = % change in quantity demanded ÷ % change in price
- Inelastic = a change in price doesn't affect demand much (PED < 1)
- Elastic = a price increase will lower demand a lot (PED > 1)
(The answer is always a minus figure.)
The answer is usually negative because a price increase (+) leads to a fall in quantity demanded (−), and vice versa — so this gives a negative answer overall.
The 'demand' of a product is the quantity of a product a customer will buy at a given price.
This is a straightforward demand curve. When price is low, demand for your products is high. At lower prices, products are more affordable to people.
A downward-sloping demand curve: at a price of £0.50, quantity demanded is around 100 units; as price falls to £0.20, quantity demanded rises to around 400 units.
Real-World Case Studies
Netflix — testing how inelastic demand really is
Netflix raised its US prices again in 2026 — the second increase in less than two years — an average rise of around 11% across its plans, taking Standard to $19.99 and Premium to $26.99 a month. Despite visible backlash online, with many subscribers saying they'd cancel, Netflix's actual monthly subscriber churn stayed at its usual low of around 2%, well below rival streaming services. This is a real example of a business testing price elasticity directly: online reaction suggested demand might be elastic, but the actual churn data suggests demand for Netflix specifically is closer to inelastic — loyal subscribers said they'd leave, but most didn't.
Source: verified via search, September 2026 — Variety and MediaPost coverage of Netflix's 2026 US price increases and subscriber churn data.
UK tobacco duty — pricing a product treated as inelastic
The UK government's tobacco duty rises by RPI inflation plus two percentage points each year, with a further one-off increase of £2.20 per 1,000 cigarettes due on 1 October 2026 — pushing an average pack of 20 cigarettes to somewhere around £16.50–£19. Governments have long used tobacco duty as both a revenue-raiser and a public health tool, reflecting an assumption that smokers' short-term demand doesn't fall much just because the price rises — precisely the definition of inelastic demand. Over the long run, sustained price rises combined with regulation and public health campaigns have been part of a much longer-term decline in UK smoking rates, showing that "inelastic in the short term" doesn't mean "inelastic forever".
Source: verified via search, September 2026 — Tobacco Journal International and Deloitte tax coverage of UK tobacco duty rates for 2026.
Quick Quiz
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1. A product has a PED of −0.3. What does this tell you?
2. If demand is price elastic, what happens to total revenue when price is increased?
3. Which of these is most likely to have highly inelastic demand?
4. Why is the PED formula's answer normally negative?
5. A business with inelastic demand for its product is considering a price rise. What is the likely outcome?
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Matching Activity
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Quick Knowledge Check
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What is the formula for PED? (1 mark)
% change in quantity demanded ÷ % change in price.
What does 'inelastic' demand mean? (1 mark)
A change in price doesn't affect demand much (PED is less than 1).
What does 'elastic' demand mean? (1 mark)
A change in price affects demand a lot (PED is greater than 1).
Key Term Flashcards
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Price Elasticity of Demand (PED)
How a price increase or decrease affects the quantity demanded of a product. PED = % change in quantity demanded ÷ % change in price.
Elastic
PED greater than 1 (ignoring the minus sign) — a price change causes a proportionally bigger change in demand.
Inelastic
PED less than 1 (ignoring the minus sign) — a price change doesn't affect demand very much.
Revenue & elasticity
If demand is elastic, raising price reduces total revenue. If demand is inelastic, raising price increases total revenue.
Factors affecting PED
Number of substitutes, whether the product is a necessity or luxury, brand loyalty, and how large a share of income the product takes up.
A*/A Stretch
Synoptic link
Connecting to market data (earlier in 3.1.3): A firm with a high market share, like Heinz in the UK ketchup market, often also has more inelastic demand for its own brand than a smaller rival — because dominant market position and brand loyalty reduce the number of substitutes customers feel they have. Strong answers should be able to link concepts across this unit, not treat market share and PED as unrelated topics.
Examiner's eye
Don't just calculate the PED figure and stop — the command word in most exam questions is "assess" or "analyse", which means you need to explain what the number means for the business (e.g. whether raising or lowering price would increase revenue) and, for "assess"/"evaluate", reach a justified judgement.
Try This With AI
Before using this: AI tools can get facts or mark scheme details wrong, and quality varies by tool. Always check anything factual against your notes or ask your teacher.
Give me a short scenario about a business changing its price, with enough numbers to calculate PED. Ask me to calculate the PED, classify it as elastic or inelastic, and explain what this means for the business's total revenue. Then check my working, not just my final answer.