IB Business Price Elasticity Demand

When Eggs Cost £7 But You Still Needed Your Full English

January 2025. You walk into Tesco, head to the eggs section, and nearly have a heart attack. £7.09 for a dozen eggs. Seven quid. For eggs. The same 12 eggs that cost £2.51 a year ago. You stand there, staring at the price tag, thinking "This must be what the teacher meant by natural selection."

However, you still bought them, didn't you?

So did millions of other people. Even as egg prices shot up over 350% in some places, even as restaurants like Waffle House started adding 50p surcharges per egg, even as some supermarkets limited customers to two cartons per family... people kept buying eggs. Because what else were you going to do? Make a Victoria sponge or your favourite omelette without eggs?

Today we are dealing with price elasticity of demand (PED) - My IB Economics students are already very familiar with this concept that explains why some price increases barely touch sales, while others cause customers to leg it to the nearest competitor. And in 2024-2025, the great egg crisis gave us a masterclass in what economists call "price inelastic demand."

What Is Price Elasticity of Demand?

Price elasticity of demand (PED) measures the extent to which demand for a product responds to changes in price. It's essentially asking: "If the price goes up, will people stop buying? Or will they grit their teeth and pay it anyway?"

There are two main types:

Price elastic demand exists when a price change leads to a larger proportional change in quantity demanded. For example:

• Price falls 5% → Quantity demanded rises 10%

• Price rises 5% → Quantity demanded falls 10%

Think about soft drinks. If Coca-Cola suddenly costs 20% more, loads of people would just switch to Pepsi, Tesco own-brand, or even just drink water. There are tons of alternatives.

Price inelastic demand exists when a price change leads to a smaller proportional change in quantity demanded. For example:

• Price rises 10% → Quantity demanded only falls 5%

• Price falls 10% → Quantity demanded only rises 5%

This is eggs in 2025. Prices went up over 350% in places, but people kept buying them because you genuinely can't make an omelette without eggs. It's literally in the expression.

The Formula (Don't Panic, You Don't Need to Calculate It)

PED is calculated using:

PED = % Change in Quantity Demanded ÷ % Change in Price

Or if you prefer:

PED = (Change in Quantity Demanded ÷ Original Quantity) ÷ (Change in Price ÷ Original Price)

It's a fraction. If the top number (quantity change) is smaller than the bottom number (price change), then PED < 1, meaning demand is price inelastic. If it's bigger, then PED > 1, meaning demand is price elastic.

Important for IB Business Management exams: You won't need to actually calculate PED values in your IB Business Management exams. The syllabus says you just need to understand the concept and how it affects business decisions. So relax - no calculator mastery required for this one.

What Makes Demand Elastic or Inelastic? The Four Determinants

Not all products react the same way to price changes. Four main factors determine whether demand will be elastic or inelastic:

1. Number and Closeness of Substitutes

The more alternatives available, the more elastic demand becomes.

High elasticity: Soft drinks, sweets, certain clothing brands

• If Cadbury chocolate gets too expensive, you can buy Galaxy, or Lindt, or Tesco's own-brand. Loads of options.

Low elasticity: Prescribed medicines, electricity, petrol

• If your doctor prescribes you medication, you can't just swap it for a different brand. You need that specific medicine.

IB Business Management Real-life example: In 2024-2025, private education in the UK demonstrated inelastic demand. Despite talks of VAT being added (making fees 20% more expensive), most private schools reported that withdrawals were minimal. Why? Because for families already paying £15,000-£40,000 per year, there aren't many close substitutes. State schools are different, but not necessarily better in parents' eyes, and other private schools charge similar amounts.

2. Degree of Necessity

Essential products have inelastic demand. Luxuries have elastic demand.

Necessities (inelastic): Food staples, housing, fuel, water Luxuries (elastic): Designer handbags, fancy restaurants, holidays

IB Business Management Real-life example: The egg crisis perfectly illustrates this. Eggs are a staple food - a necessity for baking, cooking, protein. Even when prices hit $8.15 per dozen in the US (March 2025), people kept buying them. Restaurants couldn't just remove eggs from menus. Home bakers couldn't make cakes without them.

Meanwhile, beef prices rose 13.9% in 2025, and while people still bought beef (it's relatively inelastic), some switched to chicken or plant-based alternatives. Beef is less essential than eggs for most cooking.

3. Proportion of Income Spent on the Product

The bigger the chunk of your budget something takes up, the more elastic demand becomes.

Small proportion (inelastic): Salt, matches, nail clippers

• If salt doubles in price from 50p to £1, you'll barely notice. It's still pocket change.

Large proportion (elastic): Cars, holidays, house deposits

• If a car you wanted goes from £25,000 to £30,000, you're definitely reconsidering. That's a massive chunk of money.

IB Business Management Real-life example: This is why luxury brands like Hermès can charge astronomical prices. A Birkin bag costing £450,000 is only bought by people for whom that sum is a tiny proportion of their wealth. For billionaires, it's like us buying a coffee. But for most people, that's more than a house deposit, so demand would be insanely elastic (as in, nobody would buy it).

4. Time Period

The longer the time frame, the more elastic demand becomes.

Short-term (inelastic): People need time to find alternatives and adjust habits. Long-term (elastic): Given time, people adapt, switch brands, or change behaviours entirely.

IB Business Management Real-life example: Look at petrol. When fuel prices spiked in 2024-2025, people initially kept buying the same amount (inelastic) - they still needed to get to work, drop kids at school, etc. But over time, some started carpooling, using public transport more, or even buying electric vehicles. Demand became more elastic.

The same applies to streaming services. When Netflix raised prices from £6.99 to £17.99 (for premium, ad-free), some people immediately cancelled. But many others grumbled and kept paying - short-term inelastic. Over the next year though, more subscribers gradually left as they found alternatives like Disney+, Prime Video, or just... stopped watching altogether. Long-term, demand became more elastic.

Why Is This Relevant to Businesses? PED and Revenue

PED determines whether raising prices will increase or decrease your total revenue.

Remember: Sales Revenue = Price × Quantity Sold (P × Q)

For PRICE INELASTIC products:

• If you raise prices → Revenue INCREASES (the price boost outweighs the small drop in sales)

• If you lower prices → Revenue DECREASES (the small sales boost doesn't compensate for the lower price)

For PRICE ELASTIC products:

• If you raise prices → Revenue DECREASES (customers flee, and you lose more sales than the price increase gains)

• If you lower prices → Revenue INCREASES (tons more customers buy, outweighing the lower price per unit)

IB Business Management Real-life examples:

Inelastic Demand: When Higher Prices = More Money

In 2025, egg producers didn't choose to raise prices - bird flu created a shortage, driving prices up naturally. But demand for eggs barely changed.

When prices went from $2.51 per dozen (January 2024) to $6.23 per dozen (March 2025), that's a 148% price increase. But quantity demanded only fell slightly - maybe 5-10% at most. Why? Because eggs are:

• A necessity (you need them for cooking/baking)

• Have few substitutes (you can't really replace eggs in most recipes)

• Take up a small proportion of most people's income (even at £7, it's still affordable for most)

So egg producers' revenue skyrocketed. Even though they sold slightly fewer eggs, the massive price increase more than compensated. That's price inelastic demand in action.

The American Farm Bureau noted: "Eggs are considered an inelastic good. This means that even when egg prices change, consumers still buy about the same amount of eggs. Unlike other products, in many applications such as baking, eggs don't have good substitutes."

Some grocery stores even limited purchases to two cartons per family - not because of actual shortages, but to prevent panic-buying and maintain stable supply. The demand was that strong despite the price.

Elastic Demand: When Higher Prices = Disaster

Let's look at streaming services. When Netflix kept raising prices - £6.99 → £10.99 → £15.99 for their premium ad-free plan - they found that demand was actually quite elastic. Why?

• Loads of substitutes (Disney+, Prime Video, Apple TV+, even free options like BBC iPlayer)

• Not a necessity (entertainment is nice, but optional)

• Takes up a decent chunk of income for many people (£15.99/month = £192/year)

So what happened? Netflix started losing subscribers. In 2022, they lost 200,000 subscribers in a single quarter - the first time in a decade. Their revenue actually fell despite the price increases because so many people cancelled their service.

That forced Netflix to completely rethink their strategy. They introduced a cheaper ad-supported tier (£4.99/month) to recapture price-sensitive customers. Classic elastic demand problem: raise prices too much, people bail, revenue drops.

IB Business Management Real-life examples:

Understanding PED helps businesses make smarter pricing decisions:

Supermarkets and Price Wars

UK supermarkets use PED knowledge constantly. They know that:

• Staples (bread, milk, eggs) have inelastic demand → They can't raise prices much or customers feel ripped off

• Luxury items (premium chocolates, wine) have elastic demand → Lower prices can significantly boost sales

That's why Tesco's "Clubcard Prices" strategy works. They keep staples competitive (knowing demand is inelastic anyway), but offer big discounts on elastic products to drive volume. Bread at 45p keeps customers coming in, then they buy the premium wine on offer.

In 2025, the UK supermarket price wars intensified, with Aldi and Lidl controlling nearly 20% of the market by keeping prices permanently low on inelastic goods. Meanwhile, Tesco's profits dropped £400 million as they invested in matching those prices to retain customers.

Luxury Brands and Premium Pricing

Luxury brands like Hermès, Chanel, and Rolex understand their products have relatively inelastic demand among their target customers. Why?

• Few substitutes (there's only one Hermès Birkin)

• Status symbol (necessity for their wealthy customer base)

• Tiny proportion of income (for billionaires, £100,000 is pocket change)

So they can keep raising prices with minimal impact on sales. From 2019-2024, luxury brands raised prices aggressively - some by over 50% - and still sold out. Chanel's operating profit was £4.48 billion even with price increases.

But in 2024-2025, even luxury hit a wall. Prices had gone so high that even wealthy customers started experiencing price fatigue. Luxury goods sales dropped for the first time in 15 years. Turns out, even inelastic demand has limits. Chanel stopped its usual twice-yearly price hikes in 2025.

Airlines and Fuel Surcharges

Airlines know that business travel has relatively inelastic demand (people have to fly for work meetings), while leisure travel is elastic (holidays are optional).

So what do they do? Charge business travellers way more - booking a flight the day before costs 3-4x more than booking months in advance. Business travellers pay it (inelastic). Leisure travellers book early to get discounts (elastic).

In 2025, Delta announced they'd expand AI-driven dynamic pricing from 3% to 20% of domestic flights, specifically to capitalise on this elasticity difference. Charge each customer group what they're willing to pay.

The IB Trainer's IB Business Management Activity Book covers:

✓ All 6 IB Business Management modules (5 Modules + the Complete IB Business Management Toolkit), broken down unit-by-unit

✓ 2-6 case studies per unit (some units need more practice than others)

✓ Every IB Business Management Assessment Objective (AO) explicitly addressed

✓ All 15 IB Business Management Toolkit tools with worked examples

✓ IB Business Exam Socially responsible companies (business as force for good)

✓ Platform access with supporting video content

IB Business Management Exam Corner: Know Your Customers

In 2024-2025, businesses learned some harsh PED lessons:

Eggs: Even at £7/dozen, people kept buying. Inelastic demand meant revenue soared despite price increases. Supply shortage + inelastic demand = producers' windfall.

Netflix: Raised prices too much, assumed demand was more inelastic than it was. Lost 200,000 subscribers, had to introduce cheaper tiers. Elastic demand + price hikes = revenue drops.

Luxury brands: Raised prices for years assuming inelastic demand. Hit a ceiling in 2025 when even wealthy customers said "enough." Even inelastic demand has limits.

UK supermarkets: Understand that staples are inelastic, so they compete on everything else (loyalty schemes, convenience, premium ranges) while keeping staple prices matched.

For your IB Business Management exams, remember: PED determines whether raising prices will help or hurt revenue. If demand is inelastic, higher prices = more revenue. If demand is elastic, higher prices = less revenue. It's that simple.

And next time you're standing in Tesco staring at £7 eggs thinking "This is ridiculous," you'll know exactly why they can charge that much. Because you'll buy them anyway. That's price inelastic demand, for you.

Stay well,