📏 Steep curve
Same price change, small change in quantity. Demand is price inelastic.
Elasticity » PED Diagrams and What Affects PED
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 1.1.4 (d) and (f)
- How to draw demand curves for price elastic and price inelastic demand
- What the two extreme shapes look like: perfectly elastic and perfectly inelastic
- The four factors that make PED high or low
- How to use these factors to judge how a buyer will react to a price rise
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Unlock This CourseShowing elasticity on a diagram
Medicine is a necessity with few substitutes, so its demand is price inelastic
This topic is examined on Paper 1 (Microeconomics and Business Economics). In the last lesson you worked out PED as a number. Now you will see what PED looks like on a diagram. You are not asked to calculate anything here. You are asked to draw the right shape and say why it is that shape. Remember the meaning: price elastic demand means buyers react a lot to a price change, and price inelastic demand means they react a little.
Key terms:
- Necessity: a good or service that people feel they must have, such as basic food or medicine.
- Luxury: a good or service that people want but could do without, such as designer clothes.
- Proportion of income: how big a part of a person's income is spent on one good or service.
How to draw price inelastic demand
Draw the axes first. Put price (P) on the vertical axis and quantity (Q) on the horizontal axis. Then follow these steps.
- Draw a steep downward-sloping line and label it D.
- Mark a starting price P1 on the vertical axis and draw a dotted line across to the curve. Drop a dotted line down to the quantity axis and label it Q1.
- Mark a lower price P2 (a fairly big drop). Draw a dotted line across to the curve and down to the quantity axis, and label it Q2.
- Look at the gap between Q1 and Q2. On a steep curve it is small.
The price changed a lot, but the quantity demanded barely moved. That is what price inelastic demand looks like.
How to draw price elastic demand
Use the same axes and the same size of price change, so the two diagrams can be compared fairly.
- Draw a shallow (flatter) downward-sloping line and label it D.
- Mark the same P1 and the same lower P2, with dotted lines to the curve and down to the axis.
- Label Q1 and Q2. On a shallow curve the gap between them is large.
The same price change causes a big change in quantity demanded. That is price elastic demand.
📐 Shallow curve
Same price change, large change in quantity. Demand is price elastic.
The two extreme shapes
You also need the two special cases from the last lesson. Both are shown with straight lines.
| Type | Shape to draw | What it shows |
|---|---|---|
| Perfectly price inelastic (PED = 0) | A vertical straight line, labelled D | Quantity demanded stays the same whatever the price. |
| Perfectly price elastic (PED = infinity) | A horizontal straight line, labelled D | Buyers will buy any amount at that one price, but none at all if the price rises. |
Perfectly inelastic and perfectly elastic demand are very rare in real life. They are the two ends of the scale, and real goods sit somewhere between them.
Common mistakes
- Mixing up the shapes. Remember: steep = inelastic, shallow = elastic.
- Comparing curves drawn on different scales. A fair comparison uses the same axes and the same price change.
- Forgetting to label the axes (P and Q) and the curve (D). Examiners expect all three.
- Thinking that a steeper curve means buyers do not care about the product. It only means they do not change how much they buy when the price changes.
What affects PED?
So many soft drinks to choose from means lots of substitutes, which makes demand for one brand price elastic
Why is demand for some goods elastic and for others inelastic? There are four main factors.
🔄 Substitutes
The more close substitutes a good has, the more price elastic demand is. If a cafe raises the price of its tea, customers can switch to the cafe next door. If there are few or no substitutes, buyers have nowhere to go, so demand is more inelastic.
🏥 Degree of necessity
Necessities have inelastic demand because people must buy them whatever the price, for example insulin for people with diabetes. Luxuries have elastic demand because people can simply do without them, for example a cruise holiday.
💰 Percentage of income spent
If a good takes up only a tiny part of income, a price rise is hardly noticed, so demand is more inelastic. A box of matches is an example. If it takes a large part of income, a price rise really hurts, so demand is more elastic. A new car is an example.
⌛ Time
Demand is usually more inelastic in the short run and more elastic in the long run. After a price rise, people take time to find alternatives and change their habits. A family may keep using the same heating system for now, but over a few years they may switch to a cheaper way to heat their home.
Putting it together
Examiners like you to use the factors to explain why demand has a certain elasticity. Always link the factor to the good in the question.
Worked example
Why is demand for salt likely to be price inelastic?
1. Salt is cheap, so it takes a tiny percentage of income. A price rise would hardly be noticed.
2. Most people see it as a basic part of cooking, so it is close to a necessity.
3. Because buyers would not cut back much, quantity demanded would change by a smaller percentage than price.
So the demand curve for salt would be steep.
Worked example
Why is demand for one brand of crisps likely to be price elastic?
1. There are many other brands that are close substitutes.
2. Crisps are a treat, not a necessity.
3. A price rise would send many buyers to a rival brand, so quantity demanded would fall by a bigger percentage than price.
So the demand curve for that brand would be shallow.
Exam-style question
Gopal runs a small bus company in a town with no train station. Last month he raised the price of a weekly bus pass. Many workers still bought the pass, because the bus is the only way to reach the factory. A nearby ice-cream van also raised its prices, and its sales fell sharply as children bought from a rival shop.
(a) Which one of these describes the demand curve for bus passes? [1 mark]
A. Horizontal B. Steep C. Shallow D. Upward sloping
(b) Explain one reason why demand for the ice cream is price elastic. [2 marks]
(c) Describe how you would draw the demand curve for the ice cream and show a fall in price. [3 marks]
Model answer
(a) B. Steep (1). Workers have no substitute for the bus, so demand is price inelastic.
(b) The ice cream has close substitutes (1), such as the rival shop, so when the price rises many buyers switch and quantity demanded falls by a bigger percentage than price (1).
(c) Draw price on the vertical axis and quantity on the horizontal axis (1). Draw a shallow downward-sloping line labelled D (1). Mark a lower price P2 below P1 and show quantity rising from Q1 to a much larger Q2 with dotted lines (1).
Exam tip
In an explain question, name the factor (here, substitutes) and then link it to the good in the question. Do not just write the factor on its own.