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

This guide is written for the AQA A-level Economics (7136) specification, version 1.3 of 29 June 2022. It covers “The determinants of the demand for goods and services” and “Price, income and cross elasticities of demand”, which sit under Price determination in a competitive market. The specification prints the A-level content as section 4.1.3.1 and 4.1.3.2; the AQA website numbers the same content 3.1.3.1 and 3.1.3.2. The specification states no separate labels for this content. All figures below are invented and illustrative.

Use it with the revision notes and the practice set. The wider unit is in the broader microeconomics unit. Course pages: AQA A-level Economics hub, checklist and free diagnostics.

Outcomes and where they are taught

Statement	Skill	Section
4.1.3.1	Explain that a demand curve shows the relationship between price and quantity demanded	1
4.1.3.1	Explain the causes of shifts in the demand curve	2
4.1.3.2	Calculate price, income and cross elasticities of demand and interpret the values	3, 5, 6
4.1.3.2	Link income elasticity to normal and inferior goods	5
4.1.3.2	Link cross elasticity to substitutes and complements	6
4.1.3.2	Link price elasticity to firms’ total revenue (total expenditure)	4
4.1.3.2	Explain the factors that influence these elasticities	3, 5, 6, 7

1. The demand curve

Demand is how much of a good consumers are both willing and able to purchase at every possible price over a set period, while all other influences stay fixed. “Willing and able” matters: a wish without purchasing power is not demand. A demand curve plots price on the vertical axis and quantity demanded on the horizontal axis. It normally slopes downward.

Here is an invented weekly schedule for oat bars at a college kiosk.

Price (£)	0.50	1.00	1.50	2.00	2.50
Quantity demanded	500	400	300	200	100

The schedule follows Qd = 600 − 200P. A rise in price from £1.00 to £1.50 moves you up the curve to 300 bars. That is a contraction in demand, caused only by the change in the good’s own price. A fall in price causes an extension.

Why does it slope down? A higher price means other goods are now relatively cheaper, so buyers switch (the substitution effect), and it cuts the real purchasing power of income (the income effect). Market demand is the sum of every buyer’s demand at each price.

2. Shifts in demand

Anything other than the good’s own price that changes demand at every price shifts the whole curve. Rightward is an increase in demand, leftward a decrease.

Cause	Change	Effect on demand
Real income, for a normal good	Rises	Shifts right
Real income, for an inferior good	Rises	Shifts left
Price of a rival product	Rises	Shifts right
Price of a good used alongside it	Rises	Shifts left
Tastes, fashion, advertising	Move in favour of the good	Shifts right
Population or its age structure	Group who buy the good grows	Shifts right
Interest rates and credit	Cheaper borrowing, for goods bought on credit	Shifts right
Expected future price	Expected to rise	Shifts right now

Worked example. After a news story praising oat bars, kiosk demand becomes Qd = 700 − 200P.

Price (£)	0.50	1.00	1.50	2.00	2.50
Old quantity	500	400	300	200	100
New quantity	600	500	400	300	200

At every price, 100 more bars are demanded: a parallel rightward shift. Chain of reasoning: a change in tastes raises willingness to buy at each price, so the curve moves right, and the same £1.50 now sells 400 rather than 300. Do not call this an extension, because price has not changed.

Common error: drawing a shift when the question describes a change in the good’s own price. Ask first whether the price of the good itself changed (movement along) or something else did (shift).

3. Price elasticity of demand (PED)

PED shows how strongly buyers react to a change in the good’s own price.

PED = proportional change in quantity bought, divided by proportional change in the good’s own price

A percentage change is the difference between the two values, divided by the starting value, times 100.

Worked example (elastic). A crisps brand raises its price from £2.50 to £2.75 and weekly sales fall from 500 to 440 packs.

• % change in price = 0.25 ÷ 2.50 × 100 = +10%
• % change in quantity = −60 ÷ 500 × 100 = −12%
• PED = −12 ÷ 10 = −1.2

Because of the law of demand, PED is normally negative. Some questions quote it without the sign, so state which you are using.

PED (ignoring sign)	Description	Meaning
0	Perfectly inelastic	Buyers ignore the price; vertical curve
Between 0 and 1	Price inelastic	Quantity moves proportionally less than price
Exactly 1	Unit elastic	Quantity and price move by the same proportion
Greater than 1	Price elastic	Quantity moves proportionally more than price
Infinite	Perfectly elastic	Any rise in price removes all demand; horizontal curve

The size is read as a number: −1.2 means that each 1% rise in price cuts quantity demanded by 1.2%. Interpretation matters as much as calculation.

PED changes along a straight-line demand curve. Using the kiosk schedule Qd = 600 − 200P:

• £1.00 to £1.50: price +50%, quantity −25%, PED = −0.5 (inelastic)
• £2.00 to £2.50: price +25%, quantity −50%, PED = −2.0 (elastic)

The same slope gives different elasticities, because the percentages depend on where you start. The answer also depends on direction: £2.50 to £2.00 gives price −20% and quantity +100%, so PED = −5.0. That is why a question states the change.

4. PED and total revenue (total expenditure)

Total revenue = price × quantity. What the firm receives is what consumers spend, so revenue and total expenditure move together.

Demand	Price rise	Price fall
Inelastic	Revenue rises	Revenue falls
Unit elastic	Revenue unchanged	Revenue unchanged
Elastic	Revenue falls	Revenue rises

The reasoning: revenue rises when the price effect outweighs the quantity effect.

Worked example (inelastic). A village pharmacy raises the price of a remedy from £8 to £9 and sales fall from 400 to 380.

• Price +12.5%, quantity −5%, PED = −5 ÷ 12.5 = −0.4
• Revenue before: 8 × 400 = £3,200. After: 9 × 380 = £3,420. Revenue rises by £220.

Worked example (elastic). A ferry operator cuts a fare from £20 to £18 and weekly passengers rise from 300 to 345.

• Price −10%, quantity +15%, PED = −1.5
• Revenue before: £6,000. After: 18 × 345 = £6,210, up £210.

On the kiosk schedule, revenue is £250, £400, £450, £400 and £250 at prices £0.50 to £2.50. It peaks where the curve passes from inelastic to elastic, around £1.50.

Evaluation. Revenue is not profit. A price rise with inelastic demand lifts revenue, but if costs rise with output the profit effect needs the cost data. Also consider: PED estimates are based on past behaviour; rivals may react; the short run may differ from the long run; and a firm with inelastic demand may attract regulation or public criticism if it raises prices.

5. Income elasticity of demand (YED)

YED = percentage change in quantity demanded divided by percentage change in income

Worked example. Average income in Town B rises from £20,000 to £22,000 (+10%).

• Restaurant meals: demand 80 to 92 (+15%). YED = 15 ÷ 10 = +1.5
• Bread: 50 to 51 (+2%). YED = +0.2
• Budget bus tickets: 200 to 180 (−10%). YED = −1.0

YED	Type of good	Reading
Positive	Normal good	Demand rises as income rises
Negative	Inferior good	Demand falls as income rises
Positive and above 1	Normal, income elastic (luxury-type)	Demand grows faster than income
Positive and below 1	Normal, income inelastic (necessity-type)	Demand grows more slowly than income

The sign is the key: positive means normal, negative means inferior.

Prediction. If incomes fall 4% in a recession, a good with YED +2.0 loses 8% of demand (2.0 × −4). A good with YED −0.5 gains 2% (−0.5 × −4). Firms selling income-elastic goods are exposed to downturns, while sellers of inferior goods may gain.

Factors. Whether the good is a necessity or luxury; the level of income (a good can be normal at low income and inferior at high income); and the quality of alternatives. A branded good is inferior only relative to what buyers trade up to.

6. Cross elasticity of demand (XED)

XED = percentage change in the quantity of good A bought divided by percentage change in the price of good B

Worked example (substitutes). Brand X rises from £2.50 to £2.70 (+8%). Demand for brand Y rises from 500 to 560 (+12%). XED = 12 ÷ 8 = +1.5.

Worked example (complements). Printer prices rise from £100 to £110 (+10%). Demand for ink cartridges falls from 1,000 to 940 (−6%). XED = −6 ÷ 10 = −0.6.

XED	Relationship
Positive	Substitutes: the larger the value, the closer the substitutes
Negative	Complements: the larger the magnitude, the stronger the link
Close to zero	Unrelated goods

Take care: the numerator is the quantity of the good whose demand you are studying; the denominator is the other good’s price. Mixing them up changes the answer.

Factors: how close the substitute is (brand loyalty, product features), how tightly two goods are used together, and how widely you define the market. Brands of cola are closer substitutes than cola and juice.

Uses: a firm facing a close substitute that is cheaper may lose sales fast, so it may price match. A firm selling complements may sell the main item cheaply and profit from the add-on.

7. Factors influencing PED

• Substitutes: the more and the closer, the more elastic.
• Proportion of income: a small item is less noticed, so less elastic.
• Necessity versus luxury: necessities are inelastic.
• Time: more elastic in the long run, since people find alternatives.
• Habit and addiction: these make demand inelastic.
• Definition of the market: “fuel” is inelastic, one brand of fuel elastic.

A chain for evaluation: a commuter with no alternative faces a rail fare rise; no close substitutes (inelastic), so quantity falls little, and revenue rises, but in the long run the commuter moves home or work and demand becomes more elastic.

Common errors

• Dividing by the new value rather than the original value.
• Giving a bare number without saying elastic or inelastic and what it means.
• Reporting an XED sign wrongly because the goods were swapped.
• Saying “inferior” means poor quality; in economics it means negative YED.

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.