OCR A Level Economics: Elasticity of demand and supply (PED, YED, XED, PES) (H460) – Revision Notes

These notes condense the topic Elasticity from the OCR A Level Economics (H460) specification, Version 3.0, dated June 2026 and first assessed in 2021 (Component 1, Microeconomics). No content is labelled AS or Extension in the text. The study guide has the full explanations. Then try the practice set. Related pages: the hub for OCR A Level Economics, the checklist and the free diagnostics. The numbers here are made up for illustration.

Formulas

Measure	Formula	Cause
Elasticity	% change in response ÷ % change in cause	Any
PED	% change in Qd ÷ % change in P	Own price
YED	% change in Qd ÷ % change in income	Income
XED	% change in Qd of A ÷ % change in price of B	Another price
PES	% change in Qs ÷ % change in P	Own price

• Percentage change = change ÷ starting value × 100.
• Point elasticity on a straight line: (change in quantity ÷ change in price) × (P ÷ Q).
• Total revenue = price × quantity.

Method in steps

1. Find the change in each variable and divide by its starting value.
2. Divide the response by the cause, keeping the sign.
3. State the size (above or below 1) and the sign.
4. Say what it means for the agent in the question.

Worked reminder. A fictional shop in Country A cuts a price from £20 to £19 and sales rise from 250 to 270. Price change = -1 ÷ 20 = -5%. Quantity change = +20 ÷ 250 = +8%. PED = 8 ÷ -5 = -1.6, so demand is elastic. Revenue rises from £5,000 to £5,130.

PED: values and diagrams

Value	Label	Curve shape	Total revenue after a price rise
0	Perfectly inelastic	Vertical	Rises in proportion
0 to -1	Inelastic	Steep	Rises
-1	Unit elastic	Rectangular hyperbola	No change
Below -1	Elastic	Shallow	Falls
Minus infinity	Perfectly elastic	Horizontal	Falls to zero

Straight-line demand

On any straight line PED changes with position. Take Q = 900 - 100P, which meets the price axis at £9.

Price	Quantity	PED = -100 × P ÷ Q
£3	600	-0.5
£4.50	450	-1.0
£6	300	-2.0

• High on the line: small Q, large P ÷ Q, elastic.
• Midpoint: unit elastic, and total revenue is at its maximum.
• Low on the line: large Q, small P ÷ Q, inelastic.
• Only a rectangular hyperbola has the same PED all along.

PED and total revenue

• Elastic demand: cut the price to raise revenue.
• Inelastic demand: raise the price to raise revenue.
• Mixed result check: a 5% price rise with PED = -0.4 gives a 2% fall in quantity. Revenue is 1.05 × 0.98 = 1.029 times the old figure, up 2.9%.

Determinants of PED

• Closeness and number of substitutes.
• Necessity or luxury.
• Share of income the item takes.
• Time to adjust.
• How widely the market is defined.
• Addiction and loyalty.

Evaluation tip: pick the dominant factor for the product named and argue it, then say how time changes the answer.

Indirect tax and subsidy

The less elastic side takes more of the burden of a tax and more of the benefit of a subsidy. For straight-line curves at the starting equilibrium, the buyers’ share is PES ÷ (PES + size of PED).

Worked reminder. In a fictional market, Qd = 1,000 - 50P and Qs = 150P + 200. Equilibrium: 200P = 800, so P = £4 and Q = 800. PED = -50 × 4 ÷ 800 = -0.25. PES = 150 × 4 ÷ 800 = 0.75. A tax of £0.40 per unit moves supply to Qs = 150(P - 0.40) + 200.

1,000 - 50P = 150P + 140   so   200P = 860   P = £4.30   Q = 785
Buyers' extra cost  = 4.30 - 4.00 = £0.30  (75% of the tax)
Sellers' share      = 0.40 - 0.30 = £0.10
Tax revenue         = 0.40 × 785 = £314
Check: 0.75 ÷ (0.75 + 0.25) = 0.75

If demand is	Tax	Subsidy
Inelastic	Buyers bear most, output falls little, revenue high	Buyers gain most of the lower price, output rises little
Elastic	Sellers bear most, output falls a lot	Sellers gain most, output rises a lot

Evaluation: consider the aim (revenue or cutting consumption), who is hit (low-income households if the good is a necessity), PES, and the time period.

YED

YED	Good	Effect of rising income
Negative	Inferior	Demand falls
0 to 1	Normal	Demand rises, less than income
Above 1	Superior (luxury)	Demand rises, more than income

• The sign shows direction. The size shows how fast demand moves.
• Worked reminder. Income rises £2,000 to £2,100 (+5%) and demand rises 60 to 66 (+10%). YED = 10 ÷ 5 = +2.0, a superior good.
• Prediction: YED = -0.5 with income down 4% gives quantity up 2%.
• Use: firms forecast sales through the cycle and decide product mix. Governments judge which sectors expand as incomes grow.

XED

XED	Goods
Positive	Substitutes. Larger is closer
Negative	Complements. Larger size is a tighter link
About zero	Non-related

• Substitutes. The price of a spread rises from £4.00 to £4.40 (+10%) and sales of a rival spread rise 900 to 936 (+4%). XED = +0.4.
• Complements. Phone price falls £300 to £270 (-10%) and sales of cases rise 500 to 530 (+6%). XED = 6 ÷ -10 = -0.6.
• Use: a firm judges how rivals’ price changes affect it, sets prices for linked products, and defines which rivals matter.

PES

Supply curve	PES
Vertical	0
Straight line cutting the quantity axis	0 to 1
Straight line through the origin	1
Straight line cutting the price axis	Above 1
Horizontal	Infinity

• Worked reminder. Price rises £12 to £13.20 (+10%) and supply rises 400 to 420 (+5%). PES = 0.5.
• Determinants: spare capacity, stocks, time, factor mobility, production period and perishability, barriers to entry.
• Link to tax and subsidy: more elastic supply means buyers bear less of a tax and a subsidy raises output more.

Usefulness to economic agents

Agent	Example use
Firms	Pricing, revenue forecasts, rival reactions, stock and capacity
Government	Choosing goods to tax, expected revenue, subsidy targeting
Consumers	Understanding who pays a tax and why prices change
Workers	Judging how secure an industry is

Limits to weigh: values change with time, price level and income, rely on past data, assume other things are equal, and measure one cause. They suit small, short-run decisions better than large long-run forecasts.

Must-know distinctions

• Elasticity covers the named cause only. A move along the curve comes from the good’s own price. A shift comes from anything else.
• Size of PED versus sign. Quote both, but classify elastic or inelastic by size.
• Inferior (YED below 0) versus a necessity (YED between 0 and 1).
• Substitutes (XED positive) versus complements (XED negative).
• Elastic demand with revenue falling on a price rise, versus inelastic demand with revenue rising.

Quick self-test

1. A firm raises price by 8% and quantity demanded falls by 12%. Calculate PED and say whether demand is elastic.
2. For Q = 900 - 100P, find PED at P = £6.
3. Income rises 4% and demand for a good falls 2%. Work out YED and name the type of good.
4. The price of good B rises 5% and the quantity of good A falls 3%. Calculate XED and name the relationship.
5. A price rise of 10% raises quantity supplied by 15%. Calculate PES.
6. What is PES for a supply curve that is a straight line from the origin?
7. Demand has PED = -0.4. A firm raises price 5%. What happens to revenue?
8. Which side bears more of a unit tax when demand is inelastic and supply is elastic?
9. Why does PED vary along a straight-line demand curve?
10. Give two determinants of PES.

Answers

1. -12 ÷ 8 = -1.5. Elastic.
2. Q = 900 - 600 = 300. PED = -100 × 6 ÷ 300 = -2.
3. -2 ÷ 4 = -0.5. Inferior good.
4. -3 ÷ 5 = -0.6. Complements.
5. 15 ÷ 10 = 1.5. Elastic supply.
6. 1, at every point.
7. Quantity falls 2%. Revenue = 1.05 × 0.98 = 1.029 times the old figure, so it rises 2.9%.
8. Buyers, because they respond less to a price change than sellers do.
9. The slope is constant but PED depends on P ÷ Q, which falls as you move down the line.
10. Two from: spare capacity, stocks, time, mobility of factors, length of production, barriers to entry.

Where marks are usually lost

• Measuring a percentage change from the final value instead of the starting value.
• Quoting a percentage-point difference where a percentage change is needed.
• Dropping the sign of YED or XED, so inferior goods or complements are misclassified.
• Saying a straight-line demand curve has constant elasticity because its slope is constant.
• Claiming revenue rises on any price rise, with no check on the PED.
• Leaving a tax diagram with no comparison of the buyers’ and sellers’ shares.
• Listing determinants without applying them to the named good or ranking them.
• Treating elasticity values as fixed facts rather than estimates that change with time.

Official syllabus

Source document: OCR A Level Economics (H460) specification, Version 3.0, June 2026, first assessed in 2021. Content used: Component 1, How competitive markets work, topic Elasticity.