Price Elasticity of Demand and Supply: Economics 0455 (Cambridge O Level / IGCSE)
Syllabus 2.6, 2.7 · Strand 2 The allocation of resources
- Questions
- 10
- Total marks
- 48
- Tier mix
- 10 Core
0 of 10 questions completed
Syllabus coverage
- 2.6 7 questions completed
- 2.7 3 questions completed
Knowing that demand or supply changes when price changes is only half the story; elasticity measures how much it changes. Price elasticity of demand (PED) is found by dividing the percentage change in quantity demanded by the percentage change in price, and price elasticity of supply (PES) follows the same idea using quantity supplied. The size of the resulting number, ignoring its sign, tells you whether the response is perfectly inelastic, inelastic, unitary, elastic, or perfectly elastic, and each case has a distinctive demand or supply curve shape worth being able to sketch from memory.
What makes a good elastic or inelastic comes down to a handful of determinants examiners return to repeatedly: the availability of substitutes, whether the good is a necessity or a luxury, the proportion of income it takes up, and, for supply, how quickly producers can adjust output or hold stock. PED matters beyond the calculation itself because it predicts what happens to total spending and to a firm’s revenue when price rises or falls. Spending moves in the same direction as price when demand is inelastic, and in the opposite direction when demand is elastic.
The exam-style questions below are original, written to match this syllabus objective, and each is followed by a full worked solution.
Question 1
A festival organiser raises the price of front-row tickets for an outdoor music concert by . As a result, the quantity of front-row tickets demanded falls by .
What is the price elasticity of demand (PED) for front-row concert tickets?
Question 2
A store sells a popular brand of wireless earbuds. Last month, the store increased the price of the earbuds from $40 to $50 per pair. As a result, the quantity of earbuds it sold fell from 500 pairs per week to 350 pairs per week.
(a) Calculate the percentage change in price and the percentage change in quantity demanded. [2]
(b) Calculate the price elasticity of demand (PED) for the earbuds, showing your working, and state whether demand for the earbuds is price elastic, price inelastic or unitary. [3]
(c) State and explain one determinant of price elasticity of demand that could explain why demand for the earbuds is elastic. [2]
Question 3
A bakery increases the price of its sourdough loaves from $4.00 to $5.00 per loaf. In response, the quantity of loaves it supplies each week rises from 800 to 880.
What is the price elasticity of supply (PES) of sourdough loaves?
Question 4
A small furniture workshop makes handmade wooden dining tables. It raises the price of a table from $300 to $360.
In the short run (the first month after the price rise, before the workshop can hire more staff or expand its premises) the quantity of tables it supplies rises from 40 to 44 per month.
In the long run (one year after the price rise, once the workshop has hired two more carpenters and expanded into a larger workshop) the quantity of tables it supplies is 60 per month, compared with the original 40 per month.
(a) Calculate the price elasticity of supply (PES) of dining tables in the short run. [3]
(b) Calculate the price elasticity of supply (PES) of dining tables in the long run. [3]
(c) Using your answers to (a) and (b), explain why the price elasticity of supply of dining tables is higher in the long run than in the short run. [3]
Question 5
A gym raises the price of its monthly membership from $40 to $50. Before the price rise, 2000 people held a monthly membership. After the price rise, the number of members falls to 1700.
(a) Calculate the price elasticity of demand (PED) for gym memberships, showing your working, and state whether demand is price elastic, price inelastic or unitary. [3]
(b) Calculate the gym's total monthly revenue from memberships before the price rise and after the price rise. [2]
(c) Using your answers to (a) and (b), explain the relationship between price elasticity of demand and the change in a firm's total revenue when it raises its price. [4]
Question 6
A budget airline cuts the price of an economy seat on a domestic route from $120 to $90. As a result, the quantity of seats demanded on that route rises from 1000 to 1500 per month.
What is the price elasticity of demand (PED) for economy seats on this route?
Question 7
An orange grower who supplies crates of oranges to wholesalers reduces the price per crate from $50 to $40. As a result, the quantity of crates the grower supplies each week falls from 600 to 480.
(a) Calculate the percentage change in price and the percentage change in quantity supplied. [2]
(b) Calculate the price elasticity of supply (PES) for the oranges, showing your working, and state whether supply is price elastic, price inelastic or unitary. [3]
(c) State and explain one determinant of price elasticity of supply that could help explain why supply of oranges might have an elasticity like this. [3]
Question 8
A toy shop raises the price of a trending board game from $20 to $25. As a result, the quantity of the board game it sells falls from 800 to 400 per month.
What happens to the toy shop's total monthly revenue from selling this board game as a result of the price rise?
Question 9
A cinema raises the price of a standard ticket from $8 to $10. As a result, the quantity of tickets demanded falls from 800 to 600 per week.
What is the price elasticity of demand (PED) for cinema tickets?
Question 10
A public bus company cuts the single-journey fare on a quiet rural route from $3.00 to $2.40 to try to attract more passengers. As a result, the number of passenger journeys on the route rises from 1200 to 1260 per day.
(a) Calculate the percentage change in the fare and the percentage change in the number of passenger journeys. [2]
(b) Calculate the price elasticity of demand (PED) for journeys on this route, showing your working, and state whether demand is price elastic, price inelastic or unitary. [3]
(c) Calculate the bus company's total daily revenue from this route before and after the fare cut. [2]
(d) Using your answers to (b) and (c), explain why the fare cut caused total revenue to fall, and state what this suggests the bus company should do instead if its main aim is to increase revenue from this route. [3]