IB Business Price Elasticity Demand

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

Target question:

What is price elasticity of demand (PED) in IB Business Management?

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."

Price Elasticity of Demand: IB Business Management Definitions

IB Business Management definition - Price elasticity of demand (PED):

Measures the extent to which the quantity demanded of a product responds to a change in its price.

IB Business Management definition - Price elastic demand:

Exists when a price change leads to a larger proportional change in quantity demanded (PED greater than 1) - typical of products with many substitutes, like soft drinks.

IB Business Management definition - Price inelastic demand:

Exists when a price change leads to a smaller proportional change in quantity demanded (PED less than 1) - typical of necessities with few substitutes, like eggs during the 2025 shortage.

The four determinants of elasticity are: the number and closeness of substitutes, the degree of necessity, the proportion of income spent on the product, and the time period allowed for consumers to adjust.

The key IB Business Management exam principle: PED determines whether raising prices increases or decreases total revenue - for inelastic goods, higher prices raise revenue; for elastic goods, higher prices lower it. IB Business Management students don't need to calculate PED values, only understand and apply the concept to pricing decisions.

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.

IB Business Management - Syllabus and Programme Full Guide →

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.

Practise This Topic: The IB Business Management Activity Book

PED questions reward students who can predict the effect on revenue without ever running a calculation - purely from reading the four determinants in a case study. The Activity Book's Unit 4.5 gives you exactly that kind of applied practice.

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,

Frequently Asked Questions: Price Elasticity of Demand

What is price elasticity of demand (PED) in IB Business Management?
PED measures how much the quantity demanded of a product changes in response to a change in its price, split into price elastic demand (a larger proportional change in quantity than price) and price inelastic demand (a smaller proportional change). Eggs during the 2025 shortage are a clear inelastic example - prices rose over 350% while quantity demanded barely moved. IB Business Management students need to understand and apply the concept to pricing decisions, but are not required to calculate PED values.

What are the four factors that determine whether demand is elastic or inelastic?
The four determinants are the number and closeness of substitutes (fewer substitutes means more inelastic, like prescribed medicines), the degree of necessity (necessities like food staples are more inelastic than luxuries), the proportion of income spent on the product (a small proportion like salt is inelastic, a large proportion like a car is elastic), and the time period (demand tends to be more inelastic in the short term and more elastic as people find alternatives over time, as happened gradually with Netflix subscribers).

How does PED affect a business's decision to raise or lower prices?
For products with inelastic demand, raising prices increases total revenue because the percentage price rise outweighs the small percentage fall in quantity demanded - egg producers benefited from exactly this in 2025. For products with elastic demand, raising prices decreases total revenue because customers switch away faster than the price rise can compensate for, which is what happened to Netflix after repeated price increases. Since revenue equals price multiplied by quantity sold, understanding PED lets a business predict which direction a price change will move total revenue.

Why did egg prices rise over 350% without demand falling much?
Eggs are a necessity with very few substitutes in cooking and baking, and even at higher prices they still make up a small proportion of most households' overall spending. When bird flu caused a supply shortage and pushed prices from $2.51 to $6.23 per dozen in the US, quantity demanded only fell by an estimated 5-10%, meaning producer revenue actually increased significantly. Some supermarkets limited purchases to two cartons per family not because of true scarcity, but because demand remained so strong despite the price rise.

Why did Netflix lose subscribers after raising prices, while egg producers didn't?
Netflix's product has many close substitutes (Disney+, Prime Video, Apple TV+, free options like BBC iPlayer), isn't a necessity, and takes up a noticeable chunk of many households' monthly budget - all factors that make demand elastic. Eggs, by contrast, are a necessity with almost no substitutes in most recipes and only a small impact on the household budget, making demand inelastic. That difference in elasticity is exactly why the same strategy - raising prices - grew egg producers' revenue while it shrank Netflix's, eventually forcing Netflix to introduce a cheaper ad-supported tier.

Related Content:

Continue Learning: IB Business Management Blog

IB Business Pricing Methods - read this one first if you haven't already, since PED is the concept that explains why some of those pricing methods (like premium pricing) work while others don't for a given product.

IB Business Promotion Strategies - the natural next step, moving from how price affects demand to how promotion can be used to shift demand for a product in the first place.

IB Business Management Toolkit - market research sits within the 15 Toolkit tools, so this is where students can see it applied alongside other quantitative and qualitative techniques.

IB Business Management Marketing - this is the 9th entry of the Marketing module, so this hub is the best next stop for an overview of everything else Module 4 covers.

IB Business Management - for the full course overview, syllabus breakdown and links into every other module.

Take Your Revision Further

Once you can identify the four determinants of elasticity in a case study and predict the effect of a price change on revenue, the next step is practising that judgement on full exam-style questions. The IB Business Management Activity Book gives you exam-standard case studies, model answers and marking schemes across every module - including the Marketing chapter this topic belongs to.

Explore the IB Business Management Activity Book here.

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