AQA GCSE Economics: Price elasticity of demand and supply (8136) – Revision Notes

Quick recall for AQA GCSE Economics (8136), first taught from September 2017: 3.1.3.5 Price elasticity of demand and 3.1.3.6 Price elasticity of supply. For full explanations, use the study guide. Then test yourself with the practice questions, tick the checklist, visit the AQA GCSE Economics hub or take a free diagnostic. The specification has no tiers. All figures and firms here are invented.

Key definitions

Term	Meaning
Price elasticity of demand (PED)	The size of the response of quantity demanded to a price change
Price elasticity of supply (PES)	The size of the response of quantity supplied to a price change
Price elastic	Quantity changes by a bigger percentage than price (size above 1)
Price inelastic	Quantity changes by a smaller percentage than price (size below 1)
Unit elastic	The two percentage changes are equal (size exactly 1)

The two formulas

	Formula	Usual sign
PED	%ΔQd ÷ %ΔP (percentage change in quantity demanded over percentage change in price)	Negative
PES	%ΔQs ÷ %ΔP (percentage change in quantity supplied over percentage change in price)	Positive

Percentage change = change ÷ original value × 100.

Remember that quantity always goes on the top line. Price goes underneath.

Method in steps

1. Work out the change in price and the change in quantity (new minus old).
2. Turn each change into a percentage of its starting value.
3. Put the quantity percentage over the price percentage.
4. Compare the size with 1 and state elastic or inelastic.
5. If asked, say what it means for revenue, for the firm or for consumers.

Worked reminder: PED

A shop (illustrative) raises a price from £50 to £55. Sales fall from 400 to 320.

% change in price    = 5 / 50 × 100   = +10%
% change in quantity = -80 / 400 × 100 = -20%
PED = -20 / +10 = -2.0

The size is 2.0, which is above 1, so demand is price elastic. Revenue falls from £20,000 to £17,600 (55 × 320).

Worked reminder: PES

A workshop (illustrative) sees price rise from £4 to £5. Output rises from 800 to 1,000.

% change in price    = 1 / 4 × 100     = +25%
% change in quantity = 200 / 800 × 100 = +25%
PES = +25 / +25 = +1.0

PES is exactly 1, so supply is unit elastic.

Rearranging the formula

You know	You want	Method
PED and % change in price	% change in quantity	PED × % change in price
PED and % change in quantity	% change in price	% change in quantity ÷ PED
PES and % change in price	% change in quantity supplied	PES × % change in price

Example: PES is 0.5 and quantity supplied is to rise 6%. Price must rise 6 ÷ 0.5 = 12%.

Factors affecting PED

Factor	More elastic demand	More inelastic demand
Substitutes	Plenty of close alternatives	Hardly any
Type of good	Luxury	Necessity
Share of income	Large share	Small share
Habit	Not habit forming	Habit forming or addictive
Time	Long run, when buyers can adjust	Short run
How the good is defined	A single brand	A broad category

Factors affecting PES

Factor	More elastic supply	More inelastic supply
Spare capacity	Idle machines and workers	Running at full capacity
Stocks	Finished goods in store	No stocks, or perishable goods
Time	Long run	Short run
Production period	Quick to make	Slow to make, such as crops or buildings
Switching resources	Easy to move to another product	Specialist machines and skills

Implications at a glance

If	Producers	Consumers
Demand is inelastic	Price rise raises revenue; pricing power	Pay more, can do little about it; taxes on the good hit them hard
Demand is elastic	Price cut raises revenue; competing on price; rises risk losing sales	More choice and bargaining power
Supply is elastic	Can meet rising demand quickly	Extra demand met with more output and smaller price rises
Supply is inelastic	Cannot respond quickly; may miss sales or be left with unsold stock	Prices jump when demand rises; shortages

Must-know distinctions

• Steepness is only a guide. Calculate the number rather than relying on how a curve looks.
• Negative sign versus size. A PED of -3 is more elastic than -0.5. Compare the sizes.
• Short run versus long run. Both PED and PES usually rise with time.
• Revenue versus profit. Revenue is price times quantity. Profit also depends on costs.
• Demand versus quantity demanded. A price change is a movement along the curve and elasticity measures its size. Do not describe it as a shift.

Worked reminder: a price cut and a forecast

A cafe (illustrative) cuts a price from £4.00 to £3.20. Sales rise from 250 to 300 a day.

% change in price    = -0.80 / 4.00 × 100 = -20%
% change in quantity = +50 / 250 × 100    = +20%
PED = +20 / -20 = -1.0

The size is exactly 1, so demand is unit elastic. Revenue is £1,000 before (4.00 × 250) and £960 after (3.20 × 300). Revenue is almost unchanged, but it dips slightly because the percentage changes are measured from different starting points.

Forecast: a firm sells 800 units and PED is -0.5. A 10% price rise gives -0.5 × 10% = -5%, so sales fall to 800 × 0.95 = 760.

Revenue reminders

Situation	Price rise	Price cut
Elastic (size above 1)	Revenue falls	Revenue rises
Inelastic (size below 1)	Revenue rises	Revenue falls
Unit elastic (size 1)	Revenue roughly unchanged	Revenue roughly unchanged

Revenue = price × quantity. For a quick check, multiply the price index by the quantity index. Price at 110 and quantity at 90 gives 110 × 90 ÷ 100 = 99, a fall of 1%.

Command words

• Calculate: show both percentage changes, then the division, and give the answer with its sign.
• State: a short answer, no explanation needed.
• Explain: give the reason and the consequence, for example “few substitutes, so buyers keep buying, so demand is inelastic”.
• Evaluate: weigh both sides, include short run against long run, and finish with a judgement.

Short evaluation chain

“A firm with inelastic demand should raise price.”

• Revenue rises in the short term because quantity falls by a smaller percentage than price rises.
• But rivals may enter or respond with lower prices.
• Customers may find substitutes over time, so the PED estimate may not hold.
• The estimate may come from a single past change with other factors moving too.
• Higher prices may harm goodwill, particularly for a necessity.
• A recommendation depends on how long the firm plans to stay, on costs and on how easily rivals can respond.

Quick self-test

1. State the formula for PED.
2. A price rises from £8 to £10 and quantity demanded falls from 1,200 to 1,080. Calculate PED and say whether demand is elastic or inelastic.
3. A 5% rise in price leads to a 15% rise in quantity supplied. Calculate PES.
4. PED is -0.8 and the firm raises price 10%. What is the percentage change in quantity demanded? If sales were 500, what are they now?
5. Give two factors that make demand for a good more elastic.
6. Name two things that raise the responsiveness of supply.
7. Price falls 20% and quantity demanded rises 10%. Calculate PED. What happens to revenue?
8. A firm has price elastic demand and wants to raise revenue. Should it raise or cut price? Explain.
9. Why is the supply of fresh strawberries inelastic in the short run?
10. PES is 0.5 and quantity supplied needs to rise 6%. What price rise is needed?

Answers

1. PED = %ΔQd ÷ %ΔP, the percentage change in quantity demanded over the percentage change in price.
2. Price +25%, quantity -10%. PED = -10 ÷ 25 = -0.4. The size is below 1, so demand is inelastic.
3. PES = 15 ÷ 5 = 3.0 (elastic).
4. -0.8 × 10% = -8%. New sales = 500 × 0.92 = 460.
5. Any two from: many close substitutes, a luxury, a large share of income, a long time to adjust, a narrowly defined good.
6. Any two from: spare capacity, stocks of finished goods, a long time to adjust, a short production period, resources easily switched.
7. PED = 10 ÷ -20 = -0.5. Demand is inelastic, so revenue falls. As an index, 80% of the quantity at 110% of the price gives 88% of the revenue.
8. Cut price. Quantity demanded rises by a bigger percentage than price falls, so revenue rises.
9. Strawberries take weeks to grow and cannot be stored for long, so output cannot respond quickly to a price rise.
10. 12% (6 ÷ 0.5).

Where marks are usually lost

• Taking a percentage change of the new value, not the starting one.
• Putting price on the top of the fraction.
• Writing a bare number and not stating whether demand or supply is elastic or inelastic.
• Reading a negative PED as “inelastic”. Use the size.
• Writing “demand does not change” when it means “demand changes by a smaller percentage”.
• Writing “substitutes” with no link to buyers switching away when price rises.
• Using revenue and profit as if they were the same thing.
• Giving only one side of a pricing decision when the question asks you to evaluate or advise.
• Leaving out the short-run and long-run difference when a question mentions time.
• Using a PED calculated for one product to talk about a different product.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017, published by AQA. Sections 3.1.3.5 Price elasticity of demand and 3.1.3.6 Price elasticity of supply.