📏 Perfectly inelastic
Draw a straight vertical line up from the horizontal axis. Label it D. Mark a price rise from P1 to P2 on the vertical axis. The quantity stays at Q1 because the line goes straight up.
Price Elasticity of Demand » PED Diagrams and Determinants
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 2.6.2, 2.6.3
- How to draw and interpret demand curves for the five types of PED
- How the shape of a demand curve shows whether demand is elastic or inelastic
- The main determinants of PED: substitutes, share of income, necessity or luxury, habit, time and how the market is defined
- How to use these determinants to explain whether demand for a good is elastic or inelastic
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Unlock This CourseDrawing PED on a demand diagram
Few substitutes and a tiny share of income - that's why demand for salt is inelastic
In the last lesson you calculated PED and met the five named values. Now you will see what each one looks like on a diagram. The steepness of a demand curve shows how responsive buyers are to a price change.
For every diagram, put Price on the vertical axis and Quantity on the horizontal axis. Label the curve D.
| Type of demand | Shape of the curve | What it shows |
|---|---|---|
| Perfectly inelastic (PED = 0) | A vertical straight line | Quantity demanded does not change at all when price changes |
| Inelastic (PED between 0 and 1) | A steep downward-sloping curve | A big price change causes only a small change in quantity |
| Unitary (PED = 1) | A curve that bends in towards the axes | The percentage change in quantity equals the percentage change in price, so spending stays the same |
| Elastic (PED greater than 1) | A shallow (flat) downward-sloping curve | A small price change causes a big change in quantity |
| Perfectly elastic (PED = infinity) | A horizontal straight line | Buyers will buy any amount at one price, and none at all above it |
How to draw each diagram
📈 Perfectly elastic
Draw a straight horizontal line across from the price axis. Label it D. At that one price buyers want any quantity. Above it, quantity demanded drops to zero.
⏱ Inelastic
Draw a steep downward-sloping line. A price rise from P1 to P2 moves you up the curve, but quantity falls only a little, from Q1 to Q2.
🏀 Elastic
Draw a shallow downward-sloping line. The same price rise from P1 to P2 causes a large fall in quantity, from Q1 to Q2.
⚖ Unitary
Draw a smooth curve that bends in towards the axes without touching them. Price × quantity is the same at every point on it.
Worked example: unitary demand
Worked example
A tea shop in the made-up country of Merkana raises the price of a cup of tea from $10.00 to $10.10. The quantity demanded falls from 100 cups to 99 cups a day. Is demand unitary?
Price: 0.10 ÷ 10.00 × 100 = +1%.
Quantity: −1 ÷ 100 × 100 = −1%.
PED: −1 ÷ 1 = −1. Ignoring the minus sign, PED is 1, so demand is unitary.
Spending is about the same before and after ($1,000 and about $1,000), which is how a unitary curve behaves.
Reading a diagram
When an exam question gives you a diagram, compare the change in price with the change in quantity along the curve. If the price change looks bigger than the quantity change, demand is inelastic. If the quantity change looks bigger, demand is elastic.
Describe a curve as steep or shallow by comparing it with the other curve in the question. Use the shapes in the table above and say which type of PED each one shows.
What makes demand elastic or inelastic?
Key terms:
- Determinants of PED: the influences that decide whether demand for a good is elastic or inelastic.
- Necessity: a good that people need and must buy.
- Luxury: a good that people want but could do without.
- Habit-forming good: a good that people buy again and again out of habit or dependence.
Different goods have different PED. There are six main determinants.
1. Number and closeness of substitutes
Remember, substitutes are goods that can be used in place of each other. If there are many close substitutes, buyers can easily switch when the price rises, so demand is elastic. If there are few or no close substitutes, buyers have nowhere to go, so demand is inelastic.
2. Proportion of income spent on the good
If a good takes up a large share of a buyer's income, such as a car or a holiday, a price rise is very noticeable. Buyers cut back, so demand is elastic. If a good takes up a tiny share of income, such as a box of matches, buyers barely notice a price change. Demand is inelastic.
3. Necessity or luxury
Necessities, such as basic food and medicine, are bought even when the price rises, so demand is inelastic. Luxuries can be given up, so demand is elastic.
4. Habit-forming goods
Buyers of habit-forming goods find it hard to stop. Demand is inelastic because they keep buying even when the price rises.
5. Time period
In the short run drivers still need petrol, but over time they can switch - demand becomes more elastic with time
In the short run, buyers may not have time to find alternatives, so demand is more inelastic. Over a longer time they can switch to other goods, so demand becomes more elastic. For example, if the price of petrol rises, a driver must still fill the tank this week. Over several years they may buy a smaller car or move closer to work.
6. How widely or narrowly the market is defined
A broadly defined market, such as "food", has few substitutes, because people must eat. Demand is inelastic. A narrowly defined market, such as "one brand of chocolate biscuit", has many substitutes in other brands. Demand is elastic.
🔄 Tends to be elastic
Many close substitutes. A large share of income. A luxury. A long time period. A narrowly defined market.
🔒 Tends to be inelastic
Few or no close substitutes. A small share of income. A necessity. A habit-forming good. A short time period. A broadly defined market.
Worked example: using the determinants
Worked example
The price of salt rises in the made-up country of Valdana. Is demand for salt likely to be elastic or inelastic?
Demand is likely to be inelastic. Salt has few close substitutes. It is a very small part of a household's income. Many people see it as a necessity in cooking. A price rise is therefore unlikely to change the quantity bought by much.
Common mistakes
Common mistakes
- Mixing up steep and shallow. Steep means inelastic. Shallow means elastic.
- Saying a vertical curve means demand is zero. It means quantity does not change when price changes.
- Listing determinants without applying them. Say what the good is, then why buyers will or will not cut back when the price rises.
- Forgetting the market definition. The same product can be elastic when narrowly defined and inelastic when broadly defined.
- Forgetting time. Demand is usually more inelastic in the short run than in the long run.
Exam-style question
In the made-up country of Tarmar, a company sells a bottled water brand called Clearfall for $1 a bottle. There are several other brands, and tap water is available. Electricity is sold by one supplier, households use it every day, and there is no other way for them to power their homes.
(a) Describe the shape of the demand curve for a good with perfectly inelastic demand. [2 marks]
(b) Explain two reasons why demand for Clearfall bottled water may be elastic. [4 marks]
(c) Explain why demand for electricity in Tarmar may be inelastic. [3 marks]
Model answer
(a) The demand curve is a vertical straight line (1). Quantity demanded stays the same whatever the price (1).
(b) There are several other brands, which are close substitutes (1), so buyers can easily switch to another brand if the price of Clearfall rises (1). Tap water is available, so bottled water is not a necessity (1), so buyers can easily do without it when the price rises (1).
(c) Electricity is a necessity (1). Households use it every day and there are no close substitutes (1), so they keep buying even if the price rises, which makes demand inelastic (1).
Exam tip
In an "explain" question, give a determinant, then link it to what buyers will do if the price rises. A named reason with no link earns only half the marks.