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

This guide is based on the OCR A Level Economics (H460) specification, Version 3.0, dated June 2026 and first assessed in 2021. It teaches the topic Elasticity, which sits within How competitive markets work in Component 1, Microeconomics. No content is labelled AS or Extension in the text. All numbers below are made up for illustration.

Related pages: the Microeconomics overview, the hub for OCR A Level Economics, the printable checklist and the free diagnostics to find your weak spots.

What this unit covers

Topic	You must be able to
Elasticity and PED	Explain and calculate PED by point elasticity, its values with diagrams, and why it varies along a straight line
PED in use	Explain PED and total revenue, evaluate the determinants, evaluate the effect on an indirect tax and a subsidy
YED and XED	Explain and calculate each, evaluate value and sign, and distinguish inferior, normal and superior goods, and substitutes, complements and non-related goods
PES	Explain and calculate by point elasticity, its values with diagrams, evaluate the determinants
Usefulness	Evaluate PED, YED, XED and PES for all economic agents

1. What elasticity means

Elasticity measures how responsive one variable is to a change in another. Each measure is a ratio of two percentage changes, so it has no units.

elasticity = % change in response ÷ % change in cause

PED and PES use own price as the cause. YED uses income. XED uses the price of a different good.

2. Price elasticity of demand

PED measures how far quantity demanded moves when the price of the good itself changes.

PED = % change in Qd ÷ % change in P

Demand curves slope down, so PED is negative and this guide keeps the sign. Demand is elastic when the size is above 1 and inelastic when it is below 1.

Point elasticity is PED at one price and quantity, with percentage changes measured from the starting values. On a straight-line demand curve it can also be written

PED = (change in quantity ÷ change in price) × (P ÷ Q)

Worked example 1. A laundrette in Country A (illustrative) raises the price of a wash from £5.00 to £5.50. Weekly sales fall from 400 to 352.

% change in price    = 0.50 ÷ 5.00 × 100 = +10%
% change in quantity = -48 ÷ 400 × 100  = -12%
PED = -12 ÷ 10 = -1.2

Demand is elastic. Revenue was 5.00 × 400 = £2,000 and becomes 5.50 × 352 = £1,936.

Worked example 2. Weekly demand for boat trips is Q = 1,200 - 200P. At P = £3, Q = 600 and quantity changes by -200 per £1, so PED = -200 × (3 ÷ 600) = -1.0.

The values and their diagrams

Value	Label	Shape of demand curve
0	Perfectly inelastic	Vertical
Above -1 but below 0	Inelastic	Steep
-1	Unit elastic	Rectangular hyperbola
Below -1	Elastic	Shallow
Minus infinity	Perfectly elastic	Horizontal

Along a rectangular hyperbola, price × quantity is the same everywhere, so revenue never changes.

Why PED varies along a straight-line demand curve

A straight line has a constant slope, but PED uses percentages. At a high price the quantity is small, so P ÷ Q is large. At a low price the reverse holds.

Price (£)	Quantity	PED = -200 × P ÷ Q	Total revenue (£)
5	200	-5.0	1,000
4	400	-2.0	1,600
3	600	-1.0	1,800
2	800	-0.5	1,600
1	1,000	-0.2	1,000

PED is -1 at the midpoint of the line, elastic above it and inelastic below it. It is 0 where the line meets the quantity axis and minus infinity where it meets the price axis.

PED and total revenue

Total revenue (TR) is price × quantity. Its change depends on which percentage is larger.

PED	Price rises	Price falls
Elastic	TR falls	TR rises
Unit elastic	TR unchanged	TR unchanged
Inelastic	TR rises	TR falls

On the diagram, a price rise gains the strip above the old price over the quantity still sold and loses the block under the quantity no longer sold. In the table above TR peaks at £1,800 where PED is -1. Raising the price from £2 to £3 lifts TR in the inelastic section. Raising it from £3 to £4 lowers it in the elastic section.

Determinants of PED

• Substitutes. The more close substitutes exist, the more elastic demand is.
• Necessity. Essentials are inelastic, partly because they lack close substitutes.
• Proportion of income. A cheap item takes little notice of a price rise.
• Time. Buyers change habits slowly, so long-run demand is more elastic.
• Width of market definition. Demand for a whole category is less elastic than for one brand.
• Addiction and loyalty. Both reduce responsiveness.

To evaluate, rank them for the case. A commuter rail ticket is inelastic in the short run because there is no close substitute, but over several years people can move house or job, so time raises the elasticity.

PED and the effect of an indirect tax or subsidy

Take a market in Country B (illustrative). Supply is Qs = 400P, so a tax of £0.60 per unit moves supply to Qs = 400(P - 0.60). Compare two demand curves with the same equilibrium of £3 and 1,200 units.

Demand A (inelastic): Qd = 1,800 - 200P   PED at £3 = -200 × 3 ÷ 1,200 = -0.5
Demand B (elastic):   Qd = 3,000 - 600P   PED at £3 = -600 × 3 ÷ 1,200 = -1.5

After a £0.60 tax	Demand A	Demand B
New price paid	£3.40	£3.24
New quantity	1,120	1,056
Rise in price paid by buyers	£0.40	£0.24
Share of tax paid by sellers	£0.20	£0.36
Tax revenue	£672	£633.60

Working for A: 400P - 240 = 1,800 - 200P, so P = 2,040 ÷ 600 = 3.40, Q = 1,120 and revenue = 0.60 × 1,120 = £672.

The less elastic side bears more of the tax. Buyers pay two thirds of it with demand A and two fifths with demand B. PES matters as much as PED: here PES at £3 is 400 × 3 ÷ 1,200 = 1.

For a subsidy of £0.60, supply moves to Qs = 400(P + 0.60). With demand A the price falls to £2.60 and quantity rises to 1,280. With demand B the price falls to £2.76 and quantity rises to 1,344. Demand A gives buyers a bigger price cut and demand B a bigger rise in output. The cost is 0.60 × 1,280 = £768 against 0.60 × 1,344 = £806.40.

Evaluation chain. A tax on a good with inelastic demand raises revenue reliably but barely cuts consumption, so it suits a revenue aim better than a reduction aim. Buyers bear most of it, which may hit lower-income households if the good is a necessity. With a subsidy and inelastic demand, buyers capture most of the benefit and output rises little. The time period and PES change the answer.

3. Income elasticity of demand

YED measures how far quantity demanded moves when consumer income changes.

YED = % change in Qd ÷ % change in income

Worked example 3. Income in Country A rises from £3,000 to £3,300 (+10%) and sales of an own-brand tinned soup fall from 300 to 282 (-6%). YED = -6 ÷ 10 = -0.6.

YED	Type of good	Reading
Negative	Inferior	Demand falls as income rises
0 to 1	Normal	Demand rises less than income
Above 1	Superior (luxury)	Demand rises more than income

Some books count superior goods as normal. The sign gives the direction and the size the speed.

Illustrative YED	Income +3%	Income -4%
-0.6	-1.8%	+2.4%
0.4	+1.2%	-1.6%
1.8	+5.4%	-7.2%

Check the first row: -0.6 × 3 = -1.8 and -0.6 × -4 = +2.4. A recession helps an inferior good and hits a superior one hard. A seller of superior goods gains in a boom but is exposed in a downturn. Rising incomes also shift spending towards high-YED sectors.

4. Cross elasticity of demand

XED measures how far the quantity demanded of good A moves when the price of a different good B changes.

XED = % change in Qd of A ÷ % change in price of B

Worked example 4. Tea rises from £2.50 to £2.70 (+8%) and weekly coffee sales at a cafe rise from 800 to 856 (+7%). XED = 7 ÷ 8 = +0.875, so the goods are substitutes.

Worked example 5. A sauce price rises from £2.00 to £2.20 (+10%) and pasta sales fall from 600 to 552 (-8%). XED = -8 ÷ 10 = -0.8, so the goods are complements.

XED	Relationship	Strength
Positive	Substitutes	Larger means closer
Negative	Complements	Larger size means stronger link
About zero	Non-related	B’s price does not affect A

The sign gives the direction and the size the strength of the link. A 10% price rise that moves another good’s sales by 0.25% gives XED = 0.025, close enough to zero to call the goods unrelated.

5. Price elasticity of supply

PES measures how far quantity supplied moves when the price of the good itself changes.

PES = % change in Qs ÷ % change in P

Worked example 6. A market stall raises its price from £8.00 to £8.80 (+10%) and the weekly quantity supplied rises from 600 to 630 (+5%). PES = 5 ÷ 10 = 0.5, inelastic.

On a straight-line supply curve, PES = (change in quantity ÷ change in price) × (P ÷ Q). For Qs = 50 + 10P, at P = 5, Q = 100 and PES = 10 × 5 ÷ 100 = 0.5. For Qs = 10P - 20, at P = 5, Q = 30 and PES = 10 × 5 ÷ 30 = 1.67.

Supply curve	PES	Description
Vertical	0	Quantity fixed whatever the price
Straight line cutting the quantity axis	0 to 1	Inelastic everywhere
Straight line through the origin	Exactly 1	Steep or shallow
Straight line cutting the price axis	Above 1	Elastic everywhere
Horizontal	Infinity	Any quantity is supplied at one price

The origin rule follows from the formula. If Q = 40P, then PES = 40 × P ÷ (40P) = 1 at every price.

Determinants of PES

• Spare capacity. A firm below capacity can raise output quickly.
• Stocks. Stored output can be released at once.
• Time. Supply is most elastic in the long run, when plant and workers can be added.
• Factor mobility. Resources that move easily between uses raise PES.
• Production period and perishability. Crops and long builds respond slowly, and a perishable good cannot wait for a better price.
• Barriers to entry. Easy entry makes market supply more elastic.

To evaluate, say which matters most. For farm produce the growing period usually dominates in the short run. For a service with idle staff, spare capacity does.

6. Usefulness to economic agents

Agent	Uses
Firms	Pricing and TR (PED), sales through the cycle (YED), rival moves (XED), stock and capacity (PES)
Government	Which goods to tax, expected revenue, whether a subsidy reaches buyers, how demand shifts as incomes grow
Consumers	Why prices rise for them and who gains from a subsidy
Workers	How secure an industry is, from YED

Limits. Estimates come from past data and hold only if tastes, incomes and other prices stay constant. They differ by time period and between a 2% and a 20% change, and a small survey may be unreliable.

A judgement worth giving: elasticities suit short-run decisions on small changes, such as a price adjustment, better than large long-run forecasts.

Common errors

• Using the end value as the base of a percentage change.
• Dropping the sign of YED or XED. The sign carries the meaning.
• Putting the whole tax on buyers because demand is inelastic, without comparing with supply.
• Listing determinants with no ranking.

See the revision notes for a compact version and the practice set for original questions with worked answers.

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.