TCE Economics — Level 3
Price Elasticity of Demand — Flashcards & Quiz
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price. For TCE Economics Level 3 you need to calculate PED, classify demand as elastic or inelastic, explain its determinants, and apply it to firm revenue and tax policy decisions. Elasticity is a quantitative concept — confident exam responses show the working and link the number to a business or government choice.
Key Points
- Formula: PED = % change in Qd / % change in P. Negative sign is ignored; magnitude matters.
- Classifications: elastic (|PED|>1), inelastic (|PED|<1), unit elastic (=1), perfectly elastic/inelastic (∞ or 0).
- Determinants: availability of substitutes, necessity vs luxury, % of income, time horizon, brand loyalty.
- Revenue rule: price rise raises total revenue when demand is inelastic, lowers it when elastic.
- Tax incidence: when demand is inelastic, consumers bear most of a tax; when elastic, producers bear more.
- Long-run elasticity usually exceeds short-run — consumers need time to find substitutes.
Common Mistakes to Avoid
- Confusing elastic (flat curve, big response) with inelastic (steep curve, small response).
- Forgetting to use absolute value — PED is reported as a magnitude for classification.
- Assuming necessities are always inelastic — even necessities can be elastic if close substitutes exist.
- Applying the midpoint formula incorrectly when calculating arc elasticity.
- Ignoring the time dimension — many demand curves flatten over the long run.
Exam Strategy
TCE Level 3 elasticity questions typically ask you to calculate PED, classify demand, and apply the result to revenue or tax policy. Method: (1) state the formula, (2) show calculation with percentage changes, (3) classify the result, (4) explain the underlying determinants, (5) apply to the decision — revenue, tax burden, price discrimination. Always show workings for calculation marks.
Sample Flashcards
Q1: State the law of demand and the main non-price factors that shift demand.
The law of demand states that, other things being equal, as the price of a good rises the quantity demanded falls, and as the price falls the quantity demanded rises. A change in the good's own price causes a movement ALONG the demand curve. A change in a non-price factor shifts the whole curve: income, the price of substitutes and complements, tastes and preferences, population, expectations of future prices and interest rates or credit.
Q2: What is price elasticity of demand (PED), and what makes demand elastic or inelastic?
Price elasticity of demand measures how responsive the quantity demanded is to a change in price. Demand is price elastic when quantity demanded changes by a larger proportion than price, and price inelastic when it changes by a smaller proportion. Demand tends to be more elastic when there are close substitutes, the good is a luxury, it takes a large share of income, or consumers have more time to adjust; it tends to be inelastic for necessities, goods with few substitutes and habit-forming goods.
Q3: How is the total revenue method used to identify price elasticity of demand?
Total revenue (TR) = price × quantity sold. Compare TR before and after a price change. If price rises and TR falls (or price falls and TR rises), demand is price ELASTIC. If price rises and TR rises (or price falls and TR falls), demand is price INELASTIC. If TR stays the same, demand is unit elastic. The method works because it shows whether the change in quantity is proportionally larger or smaller than the change in price.
Sample Quiz Questions
Q1: A rise in the price of a good causes the demand curve for that good to shift to the left.
Answer: FALSE
A change in the good's own price causes a movement ALONG the demand curve (a fall in quantity demanded), not a shift of the curve.
Q2: If a business raises its price and its total revenue falls, demand for its product is price elastic.
Answer: TRUE
Under the total revenue method, TR moving in the opposite direction to price shows that quantity demanded changed proportionally more than price — demand is elastic.
Q3: Demand for a necessity with few substitutes tends to be price elastic.
Answer: FALSE
Necessities with few substitutes tend to have price INELASTIC demand, because consumers keep buying them even when the price rises.
Revision Tip
PED formula, classifications and the revenue rule are classic recall — drill them with Revizi flashcards then practise interpreting case-study elasticity data.
Related Concepts
Last updated: 9 October 2026 · 3 sample flashcards · 3 sample quiz questions