Cambridge International AS and A Level Economics: Price, income and cross elasticity of demand (9708)

This guide covers section 2.2 (Price elasticity, income elasticity and cross elasticity of demand), outcomes 2.2.1 to 2.2.8, of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 2 is AS Level content. A Level candidates study it too, and the syllabus treats it as assumed knowledge for A Level Papers 3 and 4. Every firm, market and figure below is invented for illustration. None is a real statistic.

Use the Cambridge A Level Economics hub for all topics and the printable checklist to track what you have covered. Then move to the revision notes and the practice questions. The wider topic is in the price system study guide. To find weak spots first, take a free 10-minute diagnostic.

What this guide covers

Outcome	What you must be able to do
2.2.1	Define PED, YED and XED
2.2.2	Use the formulae and calculate each coefficient
2.2.3	Explain the significance of relative percentage changes, and of the size and sign of each coefficient
2.2.4	Describe elasticity values from perfectly elastic to perfectly inelastic
2.2.5	Explain how PED varies along a straight-line demand curve
2.2.6	Explain the factors affecting each elasticity
2.2.7	Link PED to total expenditure
2.2.8	Explain implications for decision-making

2.2.1 and 2.2.2: definitions and formulae

Elasticity shows how strongly buyers react when one influence on demand changes. Each type has one numerator, the percentage change in quantity demanded, and a different denominator.

Measure	Definition	Formula
PED	Responsiveness of quantity demanded to a change in the good’s own price	%ΔQd ÷ %ΔP
YED	Responsiveness of demand to a change in consumers’ income	%ΔQd ÷ %Δincome
XED	Responsiveness of demand for good A to a change in the price of good B	%ΔQd of A ÷ %ΔP of B

Percentage change = (new − old) ÷ old × 100. This guide always uses the original value as the base, so state your base if a question does not.

Worked example 1: PED. A small bakery raises the price of a sourdough loaf from 4.00 to 4.60 cu (currency units). Weekly sales fall from 500 to 440 loaves.

%ΔP  = (4.60 − 4.00) ÷ 4.00 × 100 = +15%
%ΔQd = (440 − 500) ÷ 500 × 100   = −12%
PED  = −12 ÷ 15 = −0.8

Worked example 2: YED. In Country A, average income rises from 20,000 to 21,000 cu, a rise of 5%. Demand for restaurant meals rises from 800 to 880 (+10%), and demand for bus journeys falls from 600 to 570 (−5%).

YED (restaurant meals) = +10 ÷ 5 = +2.0
YED (bus journeys)     = −5 ÷ 5  = −1.0

Worked example 3: XED. The price of Brand X cereal bars rises from 2.00 to 2.20 cu (+10%). Demand for Brand Y bars rises from 300 to 345 (+15%). XED = +15 ÷ 10 = +1.5. Separately, a games console price rises 20% and demand for its games falls from 1,000 to 900 (−10%): XED = −10 ÷ 20 = −0.5.

2.2.3: relative percentage changes, size and sign

Relative changes. Elasticity uses percentages, not absolute amounts, so it compares changes of different goods fairly. A rise from 2 to 3 cu is +50%. A rise from 20 to 21 cu is +5%. Both add about 1 cu to a price, but they are very different price changes. Elasticity also has no units, so you can compare goods measured in kilograms, journeys or subscriptions.

Sign. For PED the sign is normally negative, because price and quantity demanded move in opposite directions (the law of demand). Many answers quote the size only (“PED is 0.8”) and say so. Write the sign when you calculate, then comment on the size.

Coefficient	Sign	Meaning
YED	Positive	Normal good: demand rises as income rises
YED	Negative	Inferior good: demand falls as income rises
XED	Positive	Substitutes: a rise in B’s price raises demand for A
XED	Negative	Complements: a rise in B’s price lowers demand for A
XED	Zero (or close)	Unrelated goods

Size. For YED, a value above +1 means demand is income elastic (a “luxury” in the textbook sense, as with restaurant meals above). A value between 0 and +1 means income inelastic (a necessity). For XED, a larger size means a closer relationship. Cereal bars at +1.5 are close substitutes. The console and games at −0.5 are complements, but a weak pair.

2.2.4: describing elasticity values

Use these terms, using the size of PED.

Description	PED (size)	Quantity response	Demand curve
Perfectly inelastic	0	None	Vertical
(Highly) inelastic	between 0 and 1	Smaller % than the price change	Steep
Unitary	exactly 1	Same % as the price change	Rectangular hyperbola
(Highly) elastic	greater than 1	Larger % than the price change	Shallow
Perfectly elastic	infinity	Any price rise cuts demand to zero	Horizontal

In worked example 1, PED is −0.8, so demand is inelastic: a 15% price rise cut quantity by only 12%.

2.2.5: PED along a straight-line demand curve

The slope of a straight line is constant, but PED is not. Slope compares absolute changes. PED compares percentage changes, and a given price change is a smaller percentage of a high price than of a low price, while a given quantity change is a smaller percentage of a high quantity.

Take the demand curve P = 80 − 4Q, which meets the price axis at 80 and the quantity axis at 20. Its slope is −4 throughout. Point PED = (1 ÷ slope) × (P ÷ Q) = −0.25 × (P ÷ Q).

Price P	Quantity Q	Point PED	Total revenue (P × Q)
80	0	Minus infinity	0
60	5	−3.0 (elastic)	300
40	10	−1.0 (unitary)	400
20	15	−0.33 (inelastic)	300
0	20	0	0

So PED is elastic on the upper half, unitary at the midpoint and inelastic on the lower half. Revenue is highest at the midpoint. A sketch in words: price on the vertical axis, quantity on the horizontal, a downward line from 80 to 20, with the midpoint at (10, 40) marked as unitary.

Choice of base matters for big changes. Moving from price 60 to 40 gives %ΔP = −33.3% and %ΔQ = +100%, so PED = −3.0. Moving back from 40 to 60 gives %ΔP = +50% and %ΔQ = −50%, so PED = −1.0. Both match the point values at the starting price. Calculate over small changes, or state which base you use.

2.2.6: factors affecting each elasticity

PED. Demand is more elastic when:

• close substitutes are available, and the good is narrowly defined (one brand of yoghurt is more elastic than dairy products as a whole)
• the good is a luxury or can be delayed, and less elastic when it is a necessity or habit-forming
• it takes a large proportion of income, so a price rise is noticed
• more time passes, because consumers find alternatives and change habits

YED. It depends on the nature of the good (necessities have low or even negative YED, luxuries high), on the income level of the buyer (a good can be a luxury at low incomes and a necessity at high ones), and on the range of alternatives available as incomes rise. A good becomes inferior when buyers switch to better alternatives as they can afford them.

XED. It depends on how closely substitutable or complementary the goods are, and on how broadly each good is defined (two brands of bottled water are closer substitutes than water and juice). For complements it depends on how tightly the goods are used together.

2.2.7: PED and total expenditure

Total expenditure of consumers equals price × quantity, and is the same amount as the firm’s total revenue.

PED	Price rise	Price fall
Elastic	Expenditure falls	Expenditure rises
Unitary	No change	No change
Inelastic	Expenditure rises	Expenditure falls

Worked example 4: price cut, elastic demand. A price cut from 10 to 9 cu (−10%) raises quantity from 100 to 130 (+30%). PED = −3. Expenditure: 1,000 → 1,170. Revenue rises.

Worked example 5: price cut, inelastic demand. The same price cut raises quantity from 100 to 104 (+4%). PED = −0.4. Expenditure: 1,000 → 936. Revenue falls.

Worked example 6: price rise. A price rise from 10 to 12 cu (+20%) with PED of −0.5 cuts quantity by 10%, from 100 to 90. Expenditure: 1,000 → 1,080. With PED of −2 instead, quantity falls 40% to 60 and expenditure falls to 720.

2.2.8: implications for decision-making

PED. A firm with inelastic demand can raise price and gain revenue, though a lower quantity also cuts costs and may raise profit. A firm with elastic demand gains revenue from a cut, but only if extra output can be produced at a cost below the extra revenue. Governments use PED when choosing indirect taxes: taxing a good whose demand is inelastic yields more revenue and cuts consumption by less, which matters if the aim is revenue rather than lower use. Different groups may have different PED, so firms may set different prices for them.

YED. Firms expecting income growth plan more output of high-YED goods and less of inferior ones. In a recession a firm selling luxuries expects a larger fall in sales. Retailers use YED to choose product ranges, and governments use it to predict how tax receipts and spending patterns change with growth.

XED. A firm expects a rival’s price cut to hurt its sales when XED is high and positive, so it may match the cut. Firms selling complements coordinate prices, or sell one cheaply and the other at a margin. A firm with a product that has many close substitutes faces a high XED and little pricing freedom.

Evaluation. Coefficients are estimates from past data. They assume ceteris paribus, but tastes, incomes and other prices change together. Elasticity differs between the short run and the long run, and it varies over different price ranges. A sound judgement uses the figure but states how reliable it is.

Common errors

• Reporting PED as a positive number when the sign is asked for, or ignoring the sign for YED and XED, where it carries the meaning.
• Using the new value rather than the original as the base without saying so.
• Saying a steeper curve always means lower elasticity. Slope and elasticity differ.
• Mixing up which price goes in XED: it is the price of the other good.
• Stating that revenue rises after any price rise, without checking whether demand is elastic.
• Describing PED of 0.8 as “elastic” because the number is close to 1.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, section 2.2 (Cambridge University Press & Assessment).