Price Elasticity of Demand (PED): The Revenue Optimizer

By Ahmed Raza, M.A. Economics·Updated April 18, 2026
Graphs showing a steep inelastic demand curve juxtaposed with a flat elastic demand curve.

How do you use PED to increase total business revenue?

If your product is INELASTIC (PED < 1), you should INCREASE the price. Consumers need it and won't stop buying it, so total revenue goes up. If your product is ELASTIC (PED > 1), you should LOWER the price. The massive flood of new customers will outweigh the lower profit margin, increasing total revenue.

Table of Contents

The Law of Demand states that if price goes up, quantity demanded goes down. But as a business owner or government tax official, you don't just want to know THAT it goes down. You want to know EXACTLY HOW MUCH it goes down. This is where Price Elasticity of Demand (PED) comes in. This guide from our Ultimate O-Level Economics Guide decodes the math.

1. The PED Formula & Mathematical Trap

Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in price.

PED = % Change in Quantity Demanded (QD) ÷ % Change in Price (P)

If the question does not give you percentages, you must calculate them first using this formula:(New Value - Old Value) ÷ Old Value × 100

💡 Tutor's Tip
The Inversion Trap: Because alphabetical P comes before Q, students instinctively write Price on top. NO! Quantity Demanded is ALWAYS the numerator on top. Price is always the denominator on the bottom. Remember: "The Q sits in the tree, the P goes on the floor."

Because price and quantity move in opposite directions, your final PED answer will almost always be negative (e.g., -1.5). In O-Level economics, we ignore the negative sign when interpreting the result. We just look at the absolute number.

2. Elastic vs Inelastic Definitions

Once you have calculated the PED number, you must classify the product.

Inelastic Demand (PED between 0 and 1)

A change in price leads to a proportionately smaller change in quantity demanded. If you raise the price by 50%, you only lose 10% of your customers. Why? Because the item is likely a necessity (like petrol or life-saving medicine). On a graph, an inelastic demand curve is very STEEP.

Elastic Demand (PED greater than 1)

A change in price leads to a proportionately larger change in quantity demanded. If you raise the price by 10%, you lose 60% of your customers! Why? Because consumers are hyper-sensitive to the price of this product. On a graph, an elastic demand curve is very FLAT.

3. The 3 Determinants of Elasticity

Why is salt inelastic, but a Mercedes-Benz highly elastic? Examiners will ask you to identify the determinants of elasticity.

  • Availability of Close Substitutes: This is the biggest factor. If Pepsi raises its price by 20%, people will instantly switch to Coca-Cola. Therefore, Pepsi has elastic demand. If the government raises the tax on tap water, you can't substitute it. Tap water is inelastic.
  • Proportion of Income Spent: If a pack of chewing gum doubles in price from $1 to $2, you probably won't care because it's a tiny part of your income (inelastic). If the price of a house doubles, you absolutely care (elastic).
  • Necessity vs Luxury: Basic bread is a necessity (inelastic). A luxury cruise holiday is not (elastic).
Ahmed Raza📋 From the Desk of Ahmed Raza
If an 8-mark question asks "Evaluate whether the government should tax cigarettes to reduce smoking", you must use the word INELASTIC. Say: "Because cigarettes are highly addictive, they have an inelastic price elasticity of demand. A high tax will increase government revenue significantly, BUT it will not actually reduce the quantity of smokers by much, failing the health objective."

Frequently Asked Questions

What is the formula for Price Elasticity of Demand (PED)?▼
PED = % Change in Quantity Demanded ÷ % Change in Price.
What does it mean if PED is inelastic?▼
The PED is less than 1. The % change in quantity demanded is smaller than the % change in price. Consumers are 'locked in' to buying it.
Should a business raise or lower prices if their product is elastic?▼
LOWER the price. An elastic product (PED > 1) means consumers are highly price-sensitive. A small price drop will massively increase the quantity sold, increasing total revenue.
What factors make a product price elastic?▼
Having many close substitutes, being a luxury rather than a necessity, and taking up a large percentage of consumer income.

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