AQA GCSE Economics: Price elasticity of demand and supply: calculation, interpretation and implications (8136)

This guide follows the AQA GCSE Economics (8136) specification, first taught from September 2017. It covers 3.1.3.5 Price elasticity of demand and 3.1.3.6 Price elasticity of supply, both part of Paper 1, How markets work. The specification has no tiers, so everything here is common content. Every firm, place and number below is invented for practice.

Related pages: AQA GCSE Economics hub, printable checklist, revision notes, practice questions, the wider How markets work guide and the free diagnostics.

What this unit covers

Section	What you must be able to do
3.1.3.5	Explain that price changes do not always cause equivalent changes in demand; give the factors that affect price elasticity of demand (PED); distinguish elastic from inelastic demand; calculate PED from data; explain the implications for producers and consumers
3.1.3.6	Do the same four things for price elasticity of supply (PES)

Shifts of curves, equilibrium and revenue diagrams belong to other units. Here the focus is how far quantity responds to price.

Why elasticity matters

When a price changes, the quantity people buy changes too, but not by the same percentage each time. A 10% rise in the price of salt hardly changes how much salt a household buys. A 10% rise in the price of a cinema ticket may send many people to stay at home. Elasticity gives a number to that responsiveness.

Producers use the number when they set prices, and governments use it when they decide what to tax.

Price elasticity of demand (3.1.3.5)

The formula

PED = %ΔQd ÷ %ΔP, where %ΔQd is the percentage change in quantity demanded and %ΔP is the percentage change in price

Percentage change = (change ÷ original value) × 100. Always divide by the original figure, not the new one.

Because a price rise normally cuts quantity demanded, PED usually comes out negative. Judge the strength of the response by the size of the number, ignoring the sign. If your working gives a negative figure, write it with its sign and then say what it means.

Size of PED	Description	Meaning
Greater than 1	Price elastic	Quantity changes by a bigger percentage than price
Less than 1	Price inelastic	Quantity changes by a smaller percentage than price
Exactly 1	Unit elastic	Both change by the same percentage; the boundary between the two

Worked example 1: inelastic demand

A bakery (illustrative) raises the price of a sourdough loaf from £3.00 to £3.60. Weekly sales fall from 600 to 528.

% change in price    = (3.60 - 3.00) / 3.00 × 100 = +20%
% change in quantity = (528 - 600) / 600 × 100    = -12%
PED = -12 / +20 = -0.6

The size, 0.6, is below 1, so demand is price inelastic. Revenue moved from 3.00 × 600 = £1,800 to 3.60 × 528 = £1,900.80. The firm earns more because the price rise outweighs the lost sales.

Worked example 2: elastic demand

A coach company (illustrative) raises the adult fare on one route from £20 to £25. Passengers fall from 800 to 560 a week.

% change in price    = (25 - 20) / 20 × 100 = +25%
% change in quantity = (560 - 800) / 800 × 100 = -30%
PED = -30 / +25 = -1.2

The size, 1.2, is above 1, so demand is price elastic. Revenue falls from £16,000 to £14,000.

Worked example 3: a price cut

A small cinema (illustrative) cuts a ticket from £10 to £8. Weekly attendance rises from 300 to 390.

% change in price    = (8 - 10) / 10 × 100  = -20%
% change in quantity = (390 - 300) / 300 × 100 = +30%
PED = +30 / -20 = -1.5

Demand is elastic, so the price cut raises revenue from £3,000 to £3,120.

Worked example 4: using a known PED

A hardware shop (illustrative) sells 2,000 bags of compost a week. Its estimate of PED is -2.0. It plans a 5% price cut.

% change in quantity = PED × % change in price = -2.0 × -5% = +10%
New quantity = 2,000 × 1.10 = 2,200 bags

Rearranging the formula in this way answers “predict the new quantity” questions.

A rough diagram guide

Put price up the side of a demand diagram and quantity along the bottom. If two demand curves are drawn on the same scales, the steeper curve shows the less responsive demand.

Price
  |\            steep curve: a price change gives
  | \           a small change in quantity (inelastic)
  |  \
  |   \  \      flat curve: a price change gives
  |    \  \     a large change in quantity (elastic)
  +-----------  Quantity

Treat this as a guide only. Steepness depends on the scale used, and elasticity changes along a straight-line curve, so the calculation is the reliable test.

Factors affecting PED

1. Availability and closeness of substitutes. Many close substitutes make demand more elastic, because buyers switch easily. A single brand has more substitutes than a whole product category, so demand for one brand of cola is more elastic than demand for cola in general.
2. Necessity or luxury. Necessities are bought whatever the price, so demand is inelastic. Luxuries can be dropped, so demand is elastic.
3. Proportion of income. A small item such as matches is such a small part of spending that a price rise is barely noticed. A large item such as a holiday takes a big share, so buyers respond.
4. Habit or addiction. Buyers of habit-forming goods keep buying despite price rises.
5. Time. In the short term buyers have few alternatives. Over months they find substitutes, so demand becomes more elastic.

Implications of PED for producers

If demand is	Raising price	Cutting price
Inelastic	Revenue rises	Revenue falls
Elastic	Revenue falls	Revenue rises

• Where demand is inelastic, a firm can raise price and gain revenue. Producers of necessities and habit goods have this power.
• A firm with elastic demand may cut price, run sales or offer discounts to win revenue. Raising price risks losing many customers.
• Costs matter too. Selling fewer units can save production costs, so profit can rise even when revenue falls.

Implications of PED for consumers

• With inelastic demand, consumers are exposed. A firm can raise prices and buyers have to pay or go without.
• With elastic demand, consumers have power. Firms compete on price and a rise may send buyers elsewhere.
• Taxes on goods with inelastic demand, such as fuel, raise a lot of revenue for the government, but they also cost households a lot, particularly low-income households who spend a larger share of income on them.

Evaluating a pricing decision

A bakery with PED of -0.6 may be tempted to raise prices again. A balanced answer asks: will rivals cut price (a new rival can make demand more elastic)? Will customers find substitutes over time? Is the estimate reliable, given that it comes from one price change and other factors such as the weather may have moved at the same time? Does the gain in revenue exceed any rise in costs? A recommendation that weighs these points, and then reaches a judgement, is stronger than a one-sided “raise the price because demand is inelastic”.

Price elasticity of supply (3.1.3.6)

The formula

PES = %ΔQs ÷ %ΔP, where %ΔQs is the percentage change in quantity supplied and %ΔP is the percentage change in price

A price rise normally leads firms to supply more, so PES is normally positive. Values above 1 are price elastic supply: producers can raise output by a larger percentage than the price rise. Values below 1 are price inelastic supply. Changes in price do not always cause equivalent changes in supply, because producers cannot always adjust quickly.

Worked example 5: inelastic supply

A tomato grower (illustrative) sees the price of a box rise from £8 to £10. Supply rises from 400 to 440 boxes a week.

% change in price    = (10 - 8) / 8 × 100   = +25%
% change in quantity = (440 - 400) / 400 × 100 = +10%
PES = +10 / +25 = +0.4

PES is below 1, so supply is price inelastic. Plants take weeks to grow, so output cannot jump quickly.

Worked example 6: elastic supply

A poster workshop (illustrative) sees its price rise from £5.00 to £5.60. Output rises from 2,000 to 2,600 posters a month.

% change in price    = (5.60 - 5.00) / 5.00 × 100 = +12%
% change in quantity = (2,600 - 2,000) / 2,000 × 100 = +30%
PES = +30 / +12 = +2.5

PES is above 1, so supply is price elastic. The workshop has idle machines and can print more at once.

Worked example 7: predicting from a known PES

A pottery (illustrative) supplies 250 mugs a week. Its PES is 1.5 and the price of a mug rises 8%.

% change in quantity supplied = 1.5 × 8% = +12%
New quantity = 250 × 1.12 = 280 mugs

Worked example 8: a price fall

The price of a unit of a good falls from £10 to £9 and a firm cuts output from 600 to 570.

% change in price    = -10%
% change in quantity = (570 - 600) / 600 × 100 = -5%
PES = -5 / -10 = +0.5

Supply is inelastic. The sign is positive because both changes point the same way.

Factors affecting PES

1. Spare capacity. A firm with idle machines or workers can raise output fast. A firm already at full capacity cannot.
2. Stocks of finished goods. Stored products can be released quickly. Perishable goods cannot be stored.
3. Time. Given years rather than weeks, firms can build new factories, hire and train staff or plant more land, so supply becomes more elastic.
4. Production period. Goods that take a long time to make, such as crops or houses, have inelastic supply. Goods made in hours have elastic supply.
5. Ease of switching resources. If workers and machines can move to making another product, firms respond faster to price signals.

Implications of PES for producers

• Firms with elastic supply can take advantage of rising demand quickly and sell more. Holding spare capacity or stock raises PES, but costs money.
• Firms with inelastic supply may miss out on sales when prices rise, and may face a glut or lose income when prices fall because they cannot cut output quickly.

Implications of PES for consumers

• With elastic supply, a rise in demand is met by more output and only a small rise in price, which helps consumers.
• With inelastic supply, extra demand mainly lifts the price, as output cannot expand. Examples include seasonal fruit after a poor harvest, tickets for a venue with fixed seats and housing in a crowded town.
• Shortages are more likely when supply is inelastic.

Evaluating PES

A town needs more houses and a builder’s PES is 0.2 (illustrative). Check the working: 4% more homes needs a price rise of 4 ÷ 0.2 = 20%. Short-run prices will rise a great deal. Over several years builders can buy land, hire workers and respond, so PES in the long run is higher. A good evaluation compares the short and long run and says which matters most for the question.

Common errors

• Starting the percentage calculation from the later figure.
• Putting price on top of the fraction and quantity underneath. Quantity always goes on top.
• Calling PED of -2 “inelastic” because it is negative. Use the size.
• Saying inelastic means demand does not change at all. It changes, but by a smaller percentage than price.
• Giving a factor with no explanation. “Substitutes” alone says little. Say that many substitutes make buyers switch, so demand is more elastic.
• Stating that a price rise always raises revenue.

Next steps

Revise with the revision notes, then try the practice questions. Tick off progress on the checklist and take a free diagnostic.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017, published by AQA. Sections 3.1.3.5 and 3.1.3.6. Paper 1, How markets work, covers content 1 to 6, and is a written exam of 1 hour 45 minutes worth 80 marks and 50% of the GCSE.