Syllabus: Cambridge - IGCSE Economics
Module: 2.7 Price Elasticity of Demand (PED)
Lesson: 2.7.1 Definition of PED

Introduction

The Cambridge IGCSE Economics syllabus (0455) includes 2.7.1 Definition of PED as a core concept within the “Microeconomic Decisions” section. Students are expected to define and interpret Price Elasticity of Demand (PED) as part of understanding how consumers respond to price changes, and how firms and governments can use this data for decision-making.

This topic not only underpins many other pricing and policy-related areas in economics but also provides a critical lens for students to apply commercial reasoning — a key competency in developing workplace and career readiness. As schools look to meet Gatsby Benchmark 4 (linking curriculum learning to careers), this unit offers authentic commercial application aligned with classroom outcomes.

Key Concepts

According to the Cambridge IGCSE Economics syllabus, students must be able to:

• Define PED as the responsiveness of quantity demanded to a change in price.

• Understand and apply the formula:

  PED=% change in quantity demanded% change in price\text{PED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}PED=% change in price% change in quantity demanded​

• Interpret values of PED:

  • PED > 1: Elastic demand

  • PED < 1: Inelastic demand

  • PED = 1: Unit elastic demand

• Recognise the factors influencing PED, including:

  • Availability of substitutes

  • Proportion of income spent

  • Necessity vs luxury

  • Time period considered

• Appreciate the relevance of PED to:

  • Firms in setting prices

  • Government in taxation policy

These points support mathematical reasoning, strategic thinking, and decision-making — all skills directly mapped to commercial literacy frameworks.

Real-World Relevance

Understanding PED is essential for making real-world pricing and policy decisions:

• Supermarkets use elasticity to decide whether to cut prices to drive volume or raise prices on inelastic goods (e.g. branded milk).

• Public transport operators assess PED to decide if fare increases will generate more revenue or cause demand to drop sharply.

• The UK government considers PED when setting duties on fuel or tobacco. High inelasticity ensures tax revenues are stable even when prices rise.

Recent examples:

• Netflix and Disney+ used demand elasticity insights during their subscription price hikes in 2024. Both platforms saw minimal drop in subscriptions due to relatively inelastic demand in the short term.

• Airline pricing over school holidays shows deliberate targeting of inelastic consumer behaviour — most families book regardless of price.

These examples help students see PED not just as a mathematical formula, but a strategic business tool.

How It’s Assessed

Students will typically encounter PED in the following Cambridge IGCSE exam contexts:

• Multiple-choice questions: Interpret a PED value or select correct factor affecting elasticity.

• Short structured questions: Define PED and calculate a value from given data.

• Long-form 6–8 mark questions: Analyse how PED affects a firm’s pricing decisions or a government’s tax strategy.

Common command words include:

• Define, Calculate, Explain, Analyse, Evaluate
  Mark schemes reward application to context, not just theoretical knowledge. For example, students may be asked to analyse the PED of a new mobile phone in a competitive market.

Skills Hub Business includes assessment tools aligned with exam expectations, allowing teachers to practise these with real datasets.

Enterprise Skills Integration

The PED topic is a natural driver of applied learning, especially in the areas of:

• Decision-Making & Problem-Solving: Students must assess pricing scenarios using elasticity data, weighing potential revenue outcomes.

• Commercial Awareness: Understanding how firms make pricing decisions based on market sensitivity maps directly to organisational thinking.

• Data Literacy: Calculating PED strengthens numeracy and data interpretation, especially when students evaluate how demand shifts in different conditions.

Simulation tools available through Enterprise Skills replicate real-life business pricing scenarios, enabling students to feel the consequences of elastic vs inelastic decisions.

Careers Links

Understanding PED develops foundational thinking for several career areas:

• Marketing roles: Pricing strategy, market segmentation, and consumer behaviour.

• Economists and analysts: Forecasting demand and advising on fiscal policy.

• Retail and sales managers: Dynamic pricing, revenue optimisation.

• Public sector policy advisors: Evaluating the impact of taxation on consumer demand.

These insights support Gatsby Benchmarks:

• Benchmark 4 – curriculum linked to commercial careers

• Benchmark 5 – real employer scenarios built into sessions (e.g. tax policy from local government)

• Benchmark 6 – simulation of workplace pricing decisions with real consequences

Teaching Notes

Pedagogical tips:

• Begin with familiar goods: crisps, cinema tickets, fuel — use a class poll on “Would you still buy this if it cost 50% more?”

• Use data stories: e.g. price of Freddos over 20 years vs demand to show shifting elasticity.

• Incorporate calculations early so students gain confidence applying the formula, not just learning it.

• Use active learning strategies: roleplay as supermarket managers deciding which products to discount based on elasticity.

• Encourage peer teaching: students explain to each other why one product is more elastic than another — reinforcing understanding.

Common pitfalls:

• Confusing PED with total demand

• Misinterpreting the negative sign (PED is usually shown as a positive number in magnitude)

• Forgetting units when calculating percentage changes

Extension ideas:

• Compare elasticity of different types of transport

• Research elasticity in digital markets (e.g. Spotify, Apple subscriptions)

• Investigate cross-elasticity of demand in competitive sectors

Recommended Tool:
Enterprise Skills’ Skills Hub Business includes interactive calculators and pricing simulations aligned to Cambridge IGCSE, allowing real-time feedback and skill reinforcement.

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