Syllabus: Pearson Edexcel AS Business
Module: The Market
Lesson: 1.2.4 Price Elasticity of Demand

Introduction

This Pearson Edexcel AS Business lesson on Price Elasticity of Demand (1.2.4) sits within the Marketing and People theme. It forms a vital part of the “The Market” module, alongside lessons on supply, demand, and income elasticity. The focus here is on how consumers respond to changes in price – a core concept for pricing strategy, revenue forecasting, and competitive positioning.

Understanding price elasticity is essential for Assessment Objective 1 (demonstrate knowledge and understanding) and AO2 (apply knowledge in context). It also underpins AO3 and AO4, as students analyse business decisions and evaluate potential outcomes based on elasticity.

Key Concepts

This lesson equips students with both the theory and application of elasticity:

• Definition of PED: Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to a change in price.
• Formula: PED = % Change in Quantity Demanded / % Change in Price
• Interpreting Values:
  • PED > 1 = Elastic
  • PED < 1 = Inelastic
  • PED = 1 = Unitary
  • PED = 0 = Perfectly Inelastic
• Factors Affecting PED:
  • Availability of substitutes
  • Necessity vs luxury
  • Proportion of income spent
  • Time horizon
  • Brand loyalty
• Link to Revenue:
  • If demand is elastic, a price decrease increases total revenue.
  • If demand is inelastic, a price increase increases total revenue.
• Use of Demand Curves:
  • Illustrate elasticity at different price points.
  • Show the steepness or flatness of the curve as a visual representation of elasticity.

Real-World Relevance

Businesses of all sizes use PED to guide pricing decisions:

• Netflix faced backlash when raising subscription prices in markets where customers had access to cheaper substitutes. Their user retention in those markets revealed high elasticity.
• Luxury brands like Rolex set premium prices knowing demand is relatively inelastic due to brand prestige and lack of substitutes.
• Grocery retailers frequently experiment with pricing strategies. Tesco’s “Aldi Price Match” strategy aims to appeal to consumers with highly elastic demand in cost-of-living-sensitive categories.

In classrooms, linking elasticity to local contexts (e.g. train fares, cinema tickets, or Uber pricing) often sparks lightbulb moments.

How It’s Assessed

This topic is likely to appear in Paper 1, which covers Theme 1 (Marketing and People). Expect to see:

• Calculation Questions: “Calculate the PED given a price change from £5 to £4 and a change in quantity from 200 to 240.”
• Interpretation Questions: “What does a PED of –1.6 tell you about demand?”
• Application in Context: “Explain how a firm could use PED to inform its pricing strategy.”
• Extended Responses: “Assess the usefulness of PED for a business planning a product launch.”

Common command words: Explain, Calculate, Analyse, Assess.

Tip: Students often confuse sign with magnitude – emphasise that PED is negative, but we often work with the absolute value for interpretation.

Enterprise Skills Integration

PED is a goldmine for developing enterprise thinking:

• Problem-Solving: How should a business react to falling revenue – raise or lower prices? It depends on elasticity.
• Decision-Making: Pricing strategies become evidence-based, not guesswork.
• Adaptability: Students must adjust recommendations based on context (elastic vs inelastic demand scenarios).
• Numeracy + Critical Thinking: Interpreting figures in light of broader market conditions.

Use MarketScope AI to simulate pricing decisions and model demand shifts in response. It’s a dynamic way to show how theory meets data in practice.

Careers Links

Understanding PED directly supports Gatsby Benchmark 4 by linking curriculum learning to careers in:

• Marketing Analysis: Professionals rely on PED to optimise price points and maximise campaign ROI.
• Retail Buying: Knowing which products have inelastic demand helps inform stock decisions.
• Entrepreneurship: Small business owners use PED instinctively – even if they don’t know the formula.

For careers leads, this lesson is a springboard for conversations about why data literacy and consumer insight matter, whether students head into business, fashion, tech, or hospitality.

Teaching Notes

From the front line:

• Quick Diagnostic: Ask students to estimate whether their morning coffee or Spotify subscription is price elastic. Then challenge their assumptions with PED logic.
• Graph Work Matters: Many students lose marks for not linking diagrams to interpretation. Build fluency in shifting and analysing demand curves.
• Common Pitfalls:
  • Confusing elastic and inelastic values.
  • Forgetting negative signs in calculations.
  • Applying PED to supply questions.

Stretch Task: Present students with a fictional business scenario (e.g. launching a new energy drink) and ask them to justify a pricing strategy based on elasticity estimates.

Empathy Insight: Teachers say this topic clicks best when taught alongside real businesses and familiar price experiences. SLT and careers leads value its integration of numeracy, analysis, and real-world application—especially where cross-departmental STEM or PSHE links are possible.