AQA A-level Economics: Demand, shifts in demand and elasticities of demand (7136) – Revision Notes

These notes condense the AQA A-level Economics (7136) content on the demand curve, shifts in demand and the three elasticities of demand (specification version 1.3, sections 4.1.3.1 and 4.1.3.2, numbered 3.1.3.1 and 3.1.3.2 on the AQA website). For full explanations read the study guide, then try the practice set. Course pages: AQA A-level Economics hub, checklist, diagnostics. Related notes: microeconomics revision notes. All figures are invented.

Definitions

• Demand: the amount consumers will actually purchase, given both desire and purchasing power, at each possible price over a set time, with other influences fixed.
• Demand curve: a line linking each price to the quantity demanded; it usually slopes down.
• Movement along: triggered solely by the good’s own price changing (extension or contraction).
• Shift: caused by any other influence; rightward is an increase, leftward a decrease.
• Elasticity: how far quantity demanded reacts when price, income or another good’s price changes.

Causes of shifts

Rightward shift (increase)	Leftward shift (decrease)
Income up (normal good)	Income up (inferior good)
Substitute becomes dearer	Substitute becomes cheaper
Complement becomes cheaper	Complement becomes dearer
Tastes or advertising favour the good	Tastes turn against the good
Relevant population grows	Relevant population shrinks
Credit cheaper, confidence high	Credit dearer, confidence low
Price expected to rise	Price expected to fall

Method in steps:

1. Ask: did the good’s own price change? If yes, movement. If no, shift.
2. Name the cause and its direction.
3. Say which way the curve moves and what happens to quantity at each price.

Formulas

Measure	Formula	Sign tells you
% change	(new − old) ÷ old × 100	Direction of change
PED	% in quantity bought ÷ % in own price	Normally negative
YED	% in quantity bought ÷ % in income	Positive normal, negative inferior
XED	% in quantity of A ÷ % in price of B	Positive substitutes, negative complements
Total revenue	Price × quantity	Equals consumers’ total expenditure

Interpreting PED

PED ignoring sign	Label	Price rise gives revenue	Price fall gives revenue
0	Perfectly inelastic	Rise	Fall
0 to 1	Inelastic	Rise	Fall
1	Unit elastic	No change	No change
Above 1	Elastic	Fall	Rise
Infinite	Perfectly elastic	Fall to zero	Rise

Worked reminder. A cinema cuts a ticket from £9 to £8.10 (−10%) and attendance rises from 900 to 1,008 (+12%).

• PED = 12 ÷ (−10) = −1.2, elastic.
• Revenue: 9 × 900 = £8,100, then 8.10 × 1,008 = £8,164.80, so revenue rises.

Quick prediction. If PED is −0.25 and price rises 8%, quantity falls 2% (−0.25 × 8). Revenue becomes 1.08 × 0.98 = 1.0584 of the old figure, a rise of 5.84%.

Interpreting YED and XED

• YED above 0 and below 1: normal, income inelastic. Demand grows more slowly than income.
• YED above 1: normal, income elastic. Demand grows faster than income.
• YED below 0: inferior. If incomes rise 6% and YED is −0.8, demand falls 4.8%.
• XED above 0: substitutes. The larger, the closer.
• XED below 0: complements. The larger the magnitude, the tighter the link.
• XED near 0: little relationship.

Factors affecting elasticity

Elasticity	Factors that make it larger in size (more responsive)
PED	More and closer substitutes; luxury; large share of income; longer time period; narrowly defined good
YED	Luxury-type goods; goods with a higher-quality alternative (a stronger negative response if inferior); the income level, since a good can move from normal to inferior
XED	Closer substitutes; tighter complements; narrower market definition

Diagram reminders in words

• Movement: draw one downward-sloping demand curve, with price measured upwards and quantity measured across. A price rise slides you up the curve to a smaller quantity (contraction); a price fall slides you down (extension).
• Shift: draw the original curve D1 and a new curve D2 to its right for an increase in demand. At the same price, quantity is larger on D2. A decrease is a new curve to the left.
• Elasticity shapes: a steep curve suggests inelastic demand; a flat curve suggests elastic demand. A vertical line is perfectly inelastic and a horizontal line is perfectly elastic. Slope alone is not elasticity, because the percentages depend on the starting point.
• Revenue: total revenue is the rectangle price × quantity under the chosen point. A price rise adds the top strip and loses the right-hand strip. If demand is inelastic the strip gained is bigger.

Revenue and elasticity along a straight line

For an invented demand curve Qd = 1,200 − 150P, revenue is price × quantity:

Price (£)	2	3	4	5	6
Quantity	900	750	600	450	300
Total revenue (£)	1,800	2,250	2,400	2,250	1,800

Revenue rises as price goes up to £4, then falls. At the lower prices demand is inelastic, so a rise adds revenue; at the higher prices demand is elastic, so a rise cuts revenue. The top of the revenue curve is where the response changes from inelastic to elastic. Check: from £2 to £3, price rises 50% and quantity falls 16.7%, so PED is −0.33. From £5 to £6, price rises 20% and quantity falls 33.3%, so PED is −1.67.

Evaluation chains to learn

• Price rise when PED is low: revenue rises, but the firm should check cost changes, whether rivals will follow, and whether the long run brings more substitutes. Judgement: attractive in the short run, less sure over time.
• Price cut when PED is high: revenue rises because quantity grows by more than price falls, but profit depends on the extra cost of the extra units. Judgement: worth it if the margin is positive.
• YED in a downturn: firms selling high-YED goods lose most demand; sellers of inferior goods may see a rise. Evaluate by saying how long incomes stay low and whether buyers return.
• XED and rivals: a high positive XED means a rival’s price cut is a threat, so a firm may price match; it may also differentiate the product to lower XED.

Must-know distinctions

• Movement versus shift: own price against every other cause.
• Inelastic versus inferior: one is about size of response, the other about sign of YED.
• Elasticity versus slope: a straight demand line has constant slope but changing elasticity.
• Revenue versus profit: revenue leaves out costs.
• Short versus long run: buyers find alternatives given time, so demand usually becomes more elastic.

Quick self-test

1. A good’s price goes up from £50 to £55 while quantity falls from 200 to 170. Calculate PED.
2. Calculate the change in total revenue for question 1.
3. Income rises from £30,000 to £33,000 and demand rises from 400 to 420. Calculate YED and classify the good.
4. Incomes rise 6%. YED is −0.8. What is the change in demand?
5. Price of good A is cut from £12 to £10.80 and demand for good B rises from 200 to 230. Calculate XED and state the relationship.
6. Demand is Qd = 800 − 50P. Calculate PED for a price rise from £4 to £6.
7. A price rise moves a firm up its demand curve. True or false: demand has increased.
8. State two causes of a leftward shift in demand for a normal good.
9. Why might PED be higher in the long run than the short run?
10. A good has YED of +2.0 and incomes fall 4%. What happens to demand?

Answers

1. %ΔP = 5 ÷ 50 = +10%; %ΔQ = −30 ÷ 200 = −15%; PED = −1.5.
2. Before 50 × 200 = £10,000; after 55 × 170 = £9,350; revenue falls by £650.
3. %ΔY = +10%; %ΔQ = +5%; YED = +0.5, a normal, income inelastic good.
4. −0.8 × 6 = −4.8%.
5. %ΔP = −1.20 ÷ 12 = −10%; %ΔQ = +15%; XED = −1.5, complements.
6. At £4, Q = 600; at £6, Q = 500. %ΔP = +50%; %ΔQ = −16.7%; PED = −0.33, inelastic.
7. False. It is a contraction in quantity demanded.
8. Any two: fall in income; fall in price of a substitute; rise in price of a complement; tastes turn against it; expected price fall.
9. Buyers have time to find substitutes, change habits or move.
10. 2.0 × −4 = demand falls 8%.

Where marks are usually lost

• Using the end value as the base rather than the starting value.
• Writing a ratio of absolute changes rather than percentage changes.
• Giving a number with no label or meaning.
• Treating inferior as meaning low quality.
• Showing a shift when the good’s own price changed.
• Swapping which good’s quantity and which good’s price go in XED.
• Claiming revenue rises with a price increase without checking PED.
• Ignoring the sign, so substitutes and complements are confused.
• Calling any fall in sales a decrease in demand.

Official syllabus

Source: the A-level Economics specification published by AQA (version 1.3, 29 June 2022), content sections 4.1.3.1 and 4.1.3.2.