The four elasticities share one form
PED (price elasticity of demand) = %ΔQd / %ΔP. YED (income elasticity of demand) = %ΔQd / %ΔY (income). XED (cross-price elasticity of demand) = %ΔQd of A / %ΔP of B. PES (price elasticity of supply) = %ΔQs / %ΔP. Signs matter: PED is negative (law of demand); YED is positive for normal goods, negative for inferior; XED is positive for substitutes, negative for complements; PES is always positive.
PED and total revenue (TR)
When demand is price elastic (PED magnitude above 1), a price rise reduces TR (total revenue): the percentage fall in quantity demanded exceeds the percentage rise in price. When demand is price inelastic (PED magnitude below 1), a price rise raises TR. At unit elasticity (magnitude of exactly 1), TR is maximised. A firm uses PED to choose the direction of a price change to maximise revenue.
What determines elasticity
PED depends on the number and closeness of substitutes (the main factor), the proportion of income spent on the good, whether it is a necessity or a luxury, and the time period (demand grows more elastic over time as consumers find alternatives). PES depends on spare productive capacity, the ability to hold stocks, how easily factors of production can switch, and the time period (supply is more elastic in the long run). Apply these to the context in the question.
Drawn from real examiner reports.
Elasticity has no units; PED is negative
Elasticity is a pure ratio with no units — never write £, %, kg or "per unit" after the coefficient. By convention PED is negative (the law of demand), so 2 should be written as -2. Stating PED as positive, or confusing the magnitude with the signed value, leads to wrong conclusions about whether a good is elastic or inelastic.
November 2024 Paper 1, Q1(f): examiner explicitly reminded candidates no units on the elasticity answer.
YED sign: normal vs inferior good
A positive YED (income elasticity of demand) means a normal good; a negative YED means an inferior good. Do not read a negative YED as "inelastic" — that confuses YED with PED. Also keep a luxury (YED above 1) apart from a necessity (YED between 0 and 1). A wrong sign reading gives the wrong prediction for how demand moves as incomes change in a recession.
June 2024 Paper 1, Q1(f): YED calculation question on income change — some candidates inverted numerator and denominator.
Define, do not restate the term
A two-mark "what is meant by" (Define) question needs two distinct parts. Writing "PED is the elasticity of demand with respect to price" merely restates the term and scores zero. A good answer states (1) that it measures the responsiveness of quantity demanded and (2) to a change in price, as a ratio of percentage changes. Examples alone also score zero.
June 2024 Paper 1 and November 2024 Paper 1 both flag: no marks for restating the term or giving only examples in a Define question.
Divide by the original value
When finding a percentage change from raw figures, divide the change by the ORIGINAL (old) value, not the new one. Using the new value as the base gives the wrong percentage change and therefore the wrong elasticity. Work out each percentage change first, then divide the two.
Do not invert the elasticity ratio
The responsiveness variable goes on top: YED is %Δ quantity demanded over %Δ income, not the reverse. Inverting the fraction (income change over quantity change) gives the reciprocal and the wrong coefficient. Put the quantity response in the numerator and the causal variable in the denominator.
XED sign: substitutes vs complements
A positive XED (cross-price elasticity of demand) means the goods are substitutes (a dearer B raises demand for A); a negative XED means complements (a dearer B lowers demand for A). The larger the absolute value, the closer the relationship. Getting the sign wrong misclassifies the two goods.
Analyse is one-sided — no AO4
Analyse questions award no AO4 (evaluation) marks, so a two-sided argument wastes time. Develop one chain in depth: define the term, apply it to the data, then explain the mechanism fully. Save two-sided arguments for Assess and Evaluate, which do reward AO4.
Show the elasticity working in full
For an elasticity Calculate, show each percentage change, then the division, then the coefficient to two decimal places, with no units. State whether it is elastic or inelastic. Method marks survive a wrong final figure, so never write the answer alone.
Link elasticity to a decision
Elasticity questions usually want a decision, not just a number: use PED to advise on a price change and revenue, YED to plan for a recession, PES to judge how fast supply reacts. Interpret the coefficient for the firm or government in the scenario — do not stop at the value.
Elasticity measures how responsive one economic variable is to a change in another. All four measures follow the same template:
Where .
PED is always negative (law of demand: price up → quantity down). Ignore the sign when comparing magnitude.
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