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Elasticity of Demand and Supply for ACCA BT

Updated 11 October 2026 · Fact-checked

Elasticity measures how much one variable responds to a change in another. Price elasticity of demand = % change in quantity demanded ÷ % change in price. Income and cross elasticity use income or another good's price instead. Calculate the percentage changes, divide, then read the size and sign of the result.

Understand Elasticity of Demand and Supply

Elasticity answers one question: when something changes, how strongly do buyers or sellers react? Instead of saying demand falls when price rises, elasticity gives that reaction a number.

Price elasticity of demand (PED) measures how much quantity demanded changes when the price changes. If a 10% price rise cuts demand by 20%, PED is -2. Demand is elastic when the quantity changes by a bigger percentage than the price (ignoring the sign, PED is above 1). It is inelastic when the quantity changes by a smaller percentage (PED is below 1). Unit elastic means exactly 1.

PED is higher when there are close substitutes, when the good is a luxury, when it takes a large share of income, and when buyers have time to adjust. It is lower for necessities and habit-forming goods.

Income elasticity of demand (YED) shows how demand responds to a change in consumer income. A positive YED means a normal good. Above 1 is a luxury. Between 0 and 1 is a necessity. A negative YED means an inferior good, where demand falls as income rises.

Cross elasticity of demand (XED) shows how demand for good A responds to a change in the price of good B. A positive XED means substitutes. A negative XED means complements. Near zero means the goods are unrelated.

Price elasticity of supply (PES) shows how much quantity supplied responds to a price change. It is higher when firms have spare capacity, hold stock, or can switch production easily, and when time allows. Businesses use all of these to set prices, forecast sales and plan production.

Key formulas to remember

Price elasticity of demand (PED): PED = % change in quantity demanded ÷ % change in price; Result is normally negative. Exams usually ignore the sign and talk about size. Above 1 is elastic, below 1 is inelastic.
Income elasticity of demand (YED): YED = % change in quantity demanded ÷ % change in income; Positive = normal good, negative = inferior good, above 1 = luxury.
Cross elasticity of demand (XED): XED = % change in quantity demanded of A ÷ % change in price of B; Positive = substitutes, negative = complements.
Price elasticity of supply (PES): PES = % change in quantity supplied ÷ % change in price; Normally positive. Above 1 is elastic supply.
Percentage change: % change = (new − old) ÷ old × 100; Always divide by the original figure, not the new one.
Effect on total revenue: Elastic: price rise cuts revenue. Inelastic: price rise increases revenue.; Price cuts do the opposite. At unit elasticity revenue stays unchanged.

How to solve Elasticity of Demand and Supply questions

Use this method for any calculation or interpretation question on elasticity.

1Identify which elasticity is asked for: price, income, cross, or supply. Check what changes and what responds.
2Write down the old and new values for the cause (price or income) and the effect (quantity).
3Calculate each percentage change as (new − old) ÷ old × 100. Keep the sign.
4Divide the % change in quantity by the % change in the cause variable.
5Interpret the size: above 1 elastic, below 1 inelastic, exactly 1 unit elastic.
6Interpret the sign for income and cross elasticity: positive or negative tells you the type of good.
7If asked about a decision, link to revenue: if demand is elastic, a price cut raises total revenue; if demand is inelastic, a price rise raises total revenue. Profit also depends on costs, so revenue alone does not settle the decision.
8Check the answer fits the wording of the options, including the sign and rounding.

Quickest way: Ratio of percentages with sign check

When to use it: Use in Section A number entry or multiple choice questions where the percentage changes are given or easy to find.

If percentages are given, divide them straight away. Do not recalculate.
If values are given, work out % changes using the original as the base.
Decide the sign first. Price up and quantity down means PED is negative. Then do the arithmetic.
Compare the size with 1 to classify. For income or cross elasticity, the sign alone often answers the question.
Eliminate options that give the wrong classification before calculating precisely.

Common mistakes in Elasticity of Demand and Supply

Dividing by the new figure when calculating percentage change.
Students rush and use the final value as the base.
Fix: Always use (new − old) ÷ old. Write the base next to the figure before dividing.
Inverting the formula, giving price change ÷ quantity change.
The words price and quantity are mixed up when reading the question.
Fix: Put the effect on top. Quantity is the response, so it is the numerator.
Ignoring the sign on income and cross elasticity.
Students treat the sign as unimportant because PED signs are often ignored.
Fix: For YED and XED the sign carries the meaning. Positive XED means substitutes, negative means complements.
Saying a PED of -0.5 is more elastic than -2 because it is a bigger number below zero.
Students compare the signed values instead of the size.
Fix: Compare absolute values. A PED of -2 is elastic. A PED of -0.5 is inelastic.
Thinking an elastic demand means raising price raises revenue.
Students remember the rule backwards.
Fix: If demand is elastic, the quantity loss outweighs the price gain, so a price rise reduces revenue.
Confusing a steep demand curve with a particular elasticity at every point.
Slope and elasticity are treated as the same thing.
Fix: Elasticity uses percentage changes and can vary along a straight-line demand curve. Only judge from the calculated figure.

Worked examples

Example 1

A company raises the price of its product from $20 to $22. Monthly sales fall from 5,000 units to 4,500 units. Calculate the price elasticity of demand and state whether demand is elastic or inelastic. What happens to total revenue?

Show the solution

% change in price = (22 − 20) ÷ 20 × 100 = +10%.
% change in quantity = (4,500 − 5,000) ÷ 5,000 × 100 = -10%.
PED = -10% ÷ 10% = -1.
Size is 1, so demand is unit elastic.
Check revenue: old = 20 × 5,000 = $100,000. New = 22 × 4,500 = $99,000.
Revenue is almost unchanged, as unit elasticity predicts. The small fall of $1,000 appears because the revenue rule is exact only for small changes. A 10% rise followed by a 10% fall does not return to the starting point: 1.10 × 0.90 = 0.99. The gap does not mean demand is elastic. In the exam, use the PED of -1 to classify demand as unit elastic.

Answer: PED = -1 (unit elastic). Revenue is almost unchanged: it moves from $100,000 to $99,000, a small gap because the 10% changes are not small.

Example 2

Average income in a country rises by 8%. Demand for restaurant meals rises by 12%, while demand for supermarket own-brand bread falls by 4%. Calculate the income elasticity for each good and classify them.

Show the solution

Restaurant meals: YED = 12% ÷ 8% = +1.5.
A positive YED above 1 means a normal good that is a luxury.
Own-brand bread: YED = -4% ÷ 8% = -0.5.
A negative YED means an inferior good.
Business implication: restaurants should expect demand to grow faster than incomes in a boom, while the bread seller should expect weaker demand as incomes rise.

Answer: Restaurant meals: YED = +1.5, a luxury normal good. Own-brand bread: YED = -0.5, an inferior good.

Exam tips

In Section A, the sign and the comparison with 1 often decide the answer. Check these before doing full arithmetic.
For multiple response questions, read the number of options you must select and tick exactly that many.
Number entry questions may ask for a specific rounding or ask you to ignore the sign. Read the instruction before typing.
Learn the classification table: PED above or below 1, YED positive or negative, XED positive or negative.
In Section B, link the figure to a business decision such as pricing, promotion or production planning, and state the effect on revenue.

Practice questions from Microeconomic factors

Elasticity of Demand and Supply in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Elasticity of Demand and Supply: frequently asked questions

What is the price elasticity of demand formula in ACCA BT?

PED = % change in quantity demanded ÷ % change in price. Calculate each percentage change from the original value. The result is usually negative, and exams often focus on its size compared with 1.

How do I calculate income elasticity of demand?

Divide the % change in quantity demanded by the % change in income. A positive result means a normal good and a negative result means an inferior good. A value above 1 shows a luxury good.

What is the difference between elastic and inelastic demand?

With elastic demand, quantity changes by a larger percentage than price, so PED is above 1 in size. With inelastic demand, quantity changes by a smaller percentage, so PED is below 1. Inelastic goods are typically necessities or have few substitutes.

How does cross elasticity show substitutes and complements?

Cross elasticity compares the change in demand for one good with the price change of another. A positive value shows substitutes, because buyers switch when the other price rises. A negative value shows complements, because demand falls for both.