IB Econ Elasticity
Target Question:
What are the types of elasticity in IB Economics and how are they used?
Everything you need to understand, calculate, and apply all four types of elasticity for your IB Economics course - PED, YED, XED, and PES - with formulas, determinants, and policy applications.
Full elasticities activity practice breakdown, exam practice, model answers and evaluation tools are available exclusively in the IB Economics Activity Book and IB Economics Calculations book.
What Is Elasticity?
Elasticity measures the responsiveness of one economic variable to a change in another. In IB Economics, elasticity is used to quantify how quantity demanded or supplied responds to changes in price, income, or the price of related goods.
The general elasticity formula measures proportional (percentage) changes rather than absolute changes - this allows meaningful comparison across different goods and markets regardless of units:
Elasticity = % change in dependent variable ÷ % change in independent variable
IB Economics definition:
Elasticity is a measure of the responsiveness of quantity demanded or supplied to a change in a determining variable (price, income, or the price of a related good), expressed as the ratio of the percentage change in quantity to the percentage change in the determining variable. A value greater than 1 indicates elastic (relatively responsive) behaviour; less than 1 indicates inelastic (relatively unresponsive) behaviour.
IB Economics examines four types of elasticity: PED (price elasticity of demand), YED (income elasticity of demand), XED (cross-price elasticity of demand), and PES (price elasticity of supply).
Price Elasticity of Demand (PED)
PED measures how much quantity demanded changes in response to a change in a good's own price.
Formula: PED = % change in Qd ÷ % change in Price
PED values are almost always negative (demand curves slope downward - price rises, quantity demanded falls). In IB Economics, the sign is often noted but the significance discussed in absolute terms.
|PED| > 1 - elastic demand: quantity demanded is relatively responsive to price; a 1% price rise reduces quantity demanded by more than 1%
|PED| < 1 - inelastic demand: quantity demanded is relatively unresponsive to price; a 1% price rise reduces quantity demanded by less than 1%
|PED| = 1 - unit elastic: percentage changes in price and quantity are equal
PED = 0 - perfectly inelastic: quantity demanded does not change regardless of price (insulin for diabetics approximates this)
PED = ∞ - perfectly elastic: any price rise causes quantity demanded to fall to zero (a firm in perfect competition faces this)
Determinants of PED
Availability of substitutes - the most important determinant. The more close substitutes a good has, the more elastic its demand: consumers can easily switch when the price rises. A specific brand of cola has elastic demand (switch to another brand); cola as a category has more inelastic demand (fewer substitutes).
Necessity vs luxury - necessities (food, healthcare, utilities) tend to have inelastic demand; luxuries (foreign holidays, jewellery) tend to have elastic demand.
Proportion of income - goods that represent a large share of consumer income (cars, housing) tend to have more elastic demand than goods representing a small share (salt, matches).
Time period - demand becomes more elastic over time as consumers adjust habits and find alternatives. Short-run petrol demand is highly inelastic; long-run demand is more elastic as consumers switch to fuel-efficient cars or public transport.
Habit and addiction - addictive goods (tobacco, alcohol) have highly inelastic demand because habit formation reduces price sensitivity. Tobacco PED is estimated at approximately -0.4 to -0.5 in most studies - a 10% price rise reduces consumption by only 4-5%.
PED and Total Revenue
The relationship between PED and total revenue (TR = Price × Quantity) is one of the most important applications in IB Economics:
Elastic demand (|PED| > 1): a price rise reduces total revenue (quantity falls proportionally more than price rises); a price cut increases total revenue
Inelastic demand (|PED| < 1): a price rise increases total revenue (quantity falls proportionally less than price rises); a price cut reduces total revenue
Unit elastic (|PED| = 1): total revenue is unchanged by price changes
This relationship directly determines optimal pricing strategy for firms and the effectiveness of indirect taxes for governments.
Income Elasticity of Demand (YED)
YED measures how quantity demanded changes in response to a change in consumer income.
Formula: YED = % change in Qd ÷ % change in Income
YED values determine the classification of types of goods:
YED > 0 - normal good: demand rises as income rises (most goods)
YED > 1 - luxury good: demand rises proportionally more than income (foreign holidays, designer clothing, new cars)
0 < YED < 1 - necessity: demand rises but proportionally less than income (basic food, electricity)
YED < 0 - inferior good: demand falls as income rises (consumers switch to better alternatives - own-brand supermarket goods, public transport for some households)
Benchmark YED values commonly cited in IB Economics: food in developed economies (YED ≈ 0.3-0.6, necessity); recreation and leisure (YED ≈ 1.5-3.0, luxury); basic utilities (YED ≈ 0.4-0.7, necessity).
YED and Economic Development
YED patterns explain structural economic change as countries develop - one of the most important cross-topic connections in IB Economics.
As incomes rise with economic development:
Agriculture (low YED necessity, eventually inferior as processed food replaces staples) shrinks as a share of GDP
Manufacturing (moderate YED) initially grows as demand for durable goods rises with income
Services (high YED luxury characteristics - education, healthcare, finance, entertainment) grow disproportionately at higher income levels
This explains why advanced economies are predominantly service economies: rising incomes shift spending disproportionately toward services. The Engel's Law captures part of this: the share of income spent on food falls as income rises. Countries can anticipate which sectors will expand as by examining YED patterns - this is directly relevant to development strategy.
Cross-Price Elasticity of Demand (XED)
XED measures how the quantity demanded of one good changes in response to a price change in a different good.
Formula: XED = % change in Qd of Good A ÷ % change in Price of Good B
XED values identify the relationship between goods:
XED > 0 - substitutes: a rise in the price of Good B increases demand for Good A (consumers switch). Example: butter and margarine, Pepsi and Coca-Cola. The higher the positive XED, the closer the substitutes.
XED < 0 - complements: a rise in the price of Good B decreases demand for Good A (joint consumption falls). Example: cars and petrol, printers and ink cartridges.
XED = 0 - unrelated goods: price changes in one good have no effect on demand for the other.
XED Applications
Business strategy: high positive XED between a firm's product and a competitor's indicates close substitutability - the firm must be cautious about price rises. Low positive XED indicates brand differentiation has reduced substitutability - greater pricing power.
Competition policy: XED is used to define relevant markets for antitrust purposes. If two products have high positive XED, they are in the same market - a monopoly in one product is constrained by competition from the other.
Complement pricing: firms selling complementary goods (razors and blades, printers and ink, games consoles and software) often price the primary good low (or at a loss) to stimulate demand for the high-margin complement - a strategy only viable when XED between the products is strongly negative.
Price Elasticity of Supply (PES)
PES measures how much quantity supplied changes in response to a change in a good's price.
Formula: PES = % change in Qs ÷ % change in Price
PES is always positive (supply curves slope upward - price rises, quantity supplied rises).
PES > 1 - elastic supply: producers can respond proportionally to price changes
PES < 1 - inelastic supply: producers cannot easily expand output in response to price rises
PES = 0 - perfectly inelastic: supply cannot change regardless of price (fixed supply - unique artworks, land in a specific location)
PES = ∞ - perfectly elastic: producers will supply any quantity at the existing price (constant cost industries in perfect competition)
Determinants of PES
Time period - the most important determinant. Supply is more inelastic in the short run (fixed capital, contracted inputs) and more elastic in the long run (new capacity can be built, new firms can enter). PES increases over time as producers gain flexibility.
Spare capacity - firms with unused capacity can increase output quickly in response to price rises; firms operating at full capacity cannot. PES is higher when spare capacity exists.
Ease of factor substitution - if factors of production can easily switch between uses, supply is more elastic. Specialised equipment and skills create inelastic supply.
Availability of stocks - goods that can be stored allow producers to increase supply from inventory without expanding production; supply is more elastic where stocks exist.
Production period - agricultural goods with long growing cycles (wine grapes, timber) have highly inelastic short-run supply; manufactured goods can typically be produced more quickly.
Elasticity and Government Policy
Elasticity analysis is essential for evaluating government intervention - this is a major evaluation and assessment topic in IB Economics.
Tax Incidence
The burden of an indirect tax is split between consumers and producers according to the relative elasticities of demand and supply:
Inelastic demand, elastic supply - consumers bear most of the tax (they cannot easily reduce consumption; producers can easily exit)
Elastic demand, inelastic supply - producers bear most of the tax (consumers switch away easily; producers cannot easily reduce output)
This explains why governments tax tobacco, alcohol, and petrol - inelastic demand means the tax generates substantial revenue without dramatically reducing consumption, and the health rationale justifies the policy even if full correction of the externality is not achieved.
Pigouvian Taxes and Subsidies
The effectiveness of a Pigouvian tax (correcting a negative externality) or subsidy (correcting a positive externality) depends on elasticity. If demand is highly inelastic, a carbon tax may generate revenue but produce little change in behaviour - the externality persists. If demand is elastic, a smaller tax achieves the same quantity reduction.
Price Controls and Elasticity
The size of the shortage created by a price ceiling depends on the elasticities of demand and supply: more elastic demand and supply create larger shortages. Similarly, the size of the surplus from a price floor is larger when supply is elastic. This connects directly to the price controls hub page analysis.
Elasticity in the IB Economics Exam
Elasticity appears across all papers and is one of the most frequently examined quantitative topics:
Paper 1 - essay questions ask students to explain PED determinants, analyse tax incidence using elasticity, or evaluate policy effectiveness with elasticity reasoning. The 15-mark response should connect elasticity to specific policy outcomes.
Paper 2 - data response questions often require elasticity calculations from data, interpretation of values, or assessment of policy implications. Calculation accuracy and correct formula application are directly rewarded.
Paper 3 (HL) - extended questions may relate elasticity with development economics (YED and structural change), trade policy (import elasticity and Marshall-Lerner), or market failure (externality correction).
Most common exam mistakes: forgetting the negative sign in PED; confusing elastic/inelastic direction of total revenue change; describing determinants without explaining the mechanism; applying YED classification incorrectly (positive YED = normal good, not necessarily luxury); calculating XED incorrectly by reversing numerator and denominator.
IB Economics Market Failure - Full Guide →
IB Economics Subsidies - Full Guide →
IB Economics Price Ceilings and Price Floors - Full Guide →
IB Economics Development Economics - Full Guide →
IB Economics Diagrams Course
Every elasticity diagram - elastic and inelastic demand curves, tax incidence with different elasticities, PES short run vs long run - fully labelled with video support.
✔ PED elastic, inelastic, unit elastic, perfectly elastic/inelastic diagrams
✔ Tax incidence with relative elasticity comparisons
✔ PES short-run vs long-run diagrams
✔ 200+ diagrams covering the full syllabus · Both SL and HL labelled
Frequently Asked Questions: Elasticity in IB Economics
What are the four types of elasticity in IB Economics? The four types are: Price Elasticity of Demand (PED) - how quantity demanded responds to the good's own price change; Income Elasticity of Demand (YED) - how quantity demanded responds to income changes; Cross-Price Elasticity of Demand (XED) - how quantity demanded for one good responds to a price change in a related good; and Price Elasticity of Supply (PES) - how quantity supplied responds to the good's own price change.
How does PED affect total revenue? When demand is elastic (|PED| > 1), a price rise reduces total revenue because quantity demanded falls proportionally more than price rises. When demand is inelastic (|PED| < 1), a price rise increases total revenue because quantity demanded falls proportionally less. At unit elasticity (|PED| = 1), total revenue is unchanged. This relationship determines optimal pricing for firms and the revenue-raising effectiveness of indirect taxes for governments.
What is the difference between a normal good, a necessity, and a luxury in YED terms? All three have positive YED (demand rises with income) - but the magnitude differs. A necessity has YED between 0 and 1 (demand rises but less than proportionally with income - basic food, utilities). A luxury good has YED above 1 (demand rises more than proportionally - foreign holidays, designer goods). An inferior good has negative YED - demand falls as income rises, as consumers switch to preferred alternatives.
How does relative elasticity determine tax incidence? Tax incidence - who bears the burden of an indirect tax - depends on the relative elasticities of demand and supply. When demand is inelastic relative to supply, consumers bear most of the tax burden because they cannot easily reduce consumption. When supply is inelastic relative to demand, producers bear more of the burden. This explains why governments target inelastic goods (tobacco, alcohol, petrol) for taxation - large revenues with limited consumption reduction.
What determines Price Elasticity of Supply? The main determinants are: time period (supply becomes more elastic in the long run as producers adjust capacity); spare capacity (firms with unused capacity respond quickly to price rises); ease of factor substitution (specialised inputs create inelastic supply); availability of stocks (storable goods have more elastic supply); and length of the production period (long biological or construction cycles create inelastic short-run supply). Agricultural goods typically have very inelastic short-run PES due to biological production constraints.
This hub is updated regularly to reflect current IB Economics syllabus requirements and exam developments.
Filed under:
IB Economics Hub Page your IB Economics daily guide
IB Economics Microeconomics Hub Page access Price Elasticity of Demand and Elasticities content as well as the rest of module 2
IB Economics Diagrams Page Check Units 8 for Price elasticity of demand, 9 for Income elasticity of demand, 10 for elasticity of supply, diagrams with explanations
IB Economics Activity book Page Module 2 Microeconomics Units 2.4 for Price elasticity of demand, 2.5 for Income elasticity of demand, and 2.6 for Price Elasticity of supply exam practice, activities, model answers and IB Economics Marking schemes
IB economics Calculations Book make sure you check units 5 for Price elasticity of demand, 6 for Income elasticity of demand and 7 for Price elasticity of supply calculations exercises, IB model answers, and IB marking schemes
IB Economics Demand Page for the "law of demand" reference in the PED formula section
IB Economics Income Elasticity of Demand (YED) Page helpful theory when discussing income as a determinant
IB Economics Price Elasticity of Supply (PES) Page this is directly related to the concept of price elasticity of demand
IB Economics Market Failure Hub Page and IB Economics Government Intervention Hub Page necessary background knowledge when discussing taxation for certain items, e.g. cigarette/tobacco taxation
IB Economics Perfect Competition Page and IB Economics Monopoly Hub Page important background theory when discussing the perfectly elastic demand curve
Read Next: IB Economics Quota Hub Page
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