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: Define price elasticity of demand (PED) and explain the categories.
PED measures the responsiveness of quantity demanded to a change in price. Formula: PED = % change in Qd / % change in P. Categories: elastic (PED > 1, Qd very responsive), inelastic (PED < 1, Qd less responsive), unit elastic (PED = 1), perfectly elastic (PED = ∞, horizontal), perfectly inelastic (PED = 0, vertical). PED is always negative but often expressed as an absolute value.
Sample Quiz Questions
Q1: If PED is 0.3, demand is described as price elastic.
Answer: FALSE
PED of 0.3 means demand is price INELASTIC (PED < 1). Quantity demanded is relatively unresponsive to price changes.
Revision Tip
PED formula, classifications and the revenue rule are classic recall — drill them with Revizi flashcards then practise interpreting case-study elasticity data.
Last updated: March 2026 · 1 flashcards · 1 quiz questions