OxfordAQA International AS and A-level Economics: Demand and elasticities (9640) – Revision Notes

These notes shorten the full study guide for sections 3.1.2.1 and 3.1.2.2 of OxfordAQA’s economics specification (9640, version 1.2). The content is International AS material, examined in Unit 1, and it counts towards the International A-level too. Quantitative skills QS2 and QS8 in section 3.5 can appear in any unit. All figures are invented and illustrative. Next: the practice questions, the checklist, the course hub and the free diagnostics.

Definitions

Term	Meaning
Demand	Amount buyers want and can afford at each price during a stated period
Demand curve	Plots quantity demanded against price
Movement along the curve	Triggered by the good’s own price alone (contraction or extension)
Shift of the curve	Triggered by any other influence (increase or decrease in demand)
Normal good	Demand rises when income rises (YED positive)
Inferior good	Demand falls when income rises (YED negative)
Substitutes	Alternatives for each other (XED positive)
Complements	Used together (XED negative)
Total revenue	Price × quantity sold, which equals consumers’ total expenditure

Shifts of demand: what to remember

Influence	Shifts demand right when…	Shifts demand left when…
Income	Income rises (normal good)	Income rises (inferior good), or falls (normal good)
Wealth	Wealth rises	Wealth falls
Price of a substitute	The substitute gets dearer	The substitute gets cheaper
Price of a complement	The complement gets cheaper	The complement gets dearer
Preferences	Tastes move towards the good	Tastes move away from it
Social and emotional factors	Fashion, status or mood favour the good	They turn against it

Picture two parallel downward-sloping lines, the second to the right of the first: at the same price, a bigger quantity is wanted.

The three elasticity formulas

Measure	Formula	Sign and size tell you
PED	percentage change in quantity demanded ÷ percentage change in own price	Negative; size gives elastic (above 1), inelastic (below 1) or unit
YED	percentage change in quantity demanded ÷ percentage change in income	Positive means normal; negative means inferior; above 1 is income elastic
XED	percentage change in quantity demanded of X ÷ percentage change in price of Y	Positive means substitutes; negative means complements

Percentage change = (new − original) ÷ original × 100.

Method in steps

1. Find the percentage change in the price or income (the cause).
2. Work out the percentage change in quantity (the effect).
3. Divide effect by cause. Keep the sign.
4. State what the number means in words and in the context given.

Worked reminders

PED and revenue

In Country B (invented) a price falls from 50 to 45 and quantity rises from 800 to 920.

• % change in price = −5 ÷ 50 × 100 = −10%
• % change in quantity = +120 ÷ 800 × 100 = +15%
• PED = 15 ÷ −10 = −1.5, so demand is elastic.
• Revenue: 50 × 800 = 40,000 before; 45 × 920 = 41,400 after. Revenue rises 3.5%.

YED

Income rises from 2,000 to 2,100 (+5%). Demand for a food staple rises from 400 to 404 (+1%). YED = 1 ÷ 5 = +0.2. It is normal and income inelastic.

XED

A 12% rise in the price of good Y cuts demand for good X by 6%. XED = −6 ÷ 12 = −0.5. The goods are weak complements.

Working backwards from a given value

• PED = −0.4 and price rises 5%: quantity falls 0.4 × 5 = 2%. Revenue index is 1.05 × 0.98 = 1.029, so revenue rises 2.9%.
• YED = +2.0 and income falls 3%: quantity falls 2.0 × 3 = 6%.

Watch-out: large price changes

A price rises from 20 to 25 (+25%) and quantity falls from 300 to 240 (−20%). PED = −0.8, which suggests revenue should rise. But revenue is 20 × 300 = 6,000 before and 25 × 240 = 6,000 after. It is unchanged. When the price change is large, work out price × quantity directly rather than relying on the rule.

Price elasticity and total revenue

Demand is…	If price goes up	If price comes down
Elastic (size above 1)	Takings drop	Takings grow
Inelastic (size below 1)	Takings grow	Takings drop
Unit elastic (size equal to 1)	Takings unchanged	Takings unchanged

On a straight-line demand curve, demand is elastic towards the top left, inelastic towards the bottom right, and unit elastic at the midpoint, where revenue is at its maximum. PED therefore varies along a straight-line curve even though the slope stays constant.

Determinants of the elasticities

Measure	Higher size when…	Lower size when…
PED	Many close substitutes; luxury; large share of income; long time period; narrowly defined good	Few substitutes; necessity; small share of income; short period; broadly defined good; habit
YED	The good is a luxury or an experience that people buy more of as they grow richer	The good is a basic item, or is replaced as incomes rise (negative)
XED	Goods are close substitutes or tightly linked complements	Goods are only loosely related

Must-know distinctions

• Sliding along one curve (own price) versus the curve itself moving (everything else).
• Price elastic (size above 1) versus income elastic (YED above 1). They are different measures.
• Normal good (positive YED) versus inferior good (negative YED). Inferior does not mean poor quality.
• Substitute (positive XED) versus complement (negative XED).
• Elasticity (proportional response) versus slope (absolute response).

Chains of reasoning to practise

• A rise in the price of a substitute shifts demand right, because buyers switch, so quantity at every price is higher.
• A firm with inelastic demand that raises its price sees quantity fall by a smaller percentage, so revenue rises. Whether profit rises depends on costs.
• Rising incomes shift demand right for normal goods and left for inferior goods. The size of the shift depends on YED.
• Over time, PED tends to become more elastic, because consumers find alternatives, so a revenue gain from a price rise may fade.

Quick self-test

1. Distinguish a contraction in quantity demanded from a decrease in demand.
2. A price rises from 8 to 10 and quantity falls from 500 to 420. Calculate PED.
3. For question 2, what happens to revenue, and does it match the PED?
4. Income rises from 3,000 to 3,150 and demand for a product rises from 60 to 69. Calculate YED and classify the good.
5. Income goes up from 1,000 to 1,100 and demand falls from 50 to 45. Calculate YED and classify the good.
6. A 5% rise in the price of good Y lowers demand for good X by 3.5%. Calculate XED and state the relationship.
7. PED is −1.8. The firm cuts price by 5%. Find the percentage change in quantity and the revenue index.
8. PED is −0.5. A price rises from 40 to 46 with 1,000 units sold before. Find the new quantity and the revenue change.
9. State two factors that make demand for a product more price elastic.
10. Why is a straight-line demand curve not equally elastic along its length?

Answers

1. A contraction is a movement along the curve caused by a rise in the good’s own price. A decrease in demand is a leftward shift caused by another influence.
2. % change in price = 2 ÷ 8 × 100 = +25%. % change in quantity = −80 ÷ 500 × 100 = −16%. PED = −16 ÷ 25 = −0.64, so inelastic.
3. Revenue rises from 4,000 to 4,200 (+5%), which matches inelastic demand.
4. % change in income = +5%; % change in quantity = +15%. YED = +3.0. A normal, income elastic good.
5. % change in income = +10%; % change in quantity = −10%. YED = −1.0. An inferior good.
6. XED = −3.5 ÷ 5 = −0.7. The goods are complements.
7. Quantity changes by 1.8 × 5 = +9%. Revenue index = 0.95 × 1.09 = 1.0355, so revenue rises about 3.6%.
8. Price change = +15%, so quantity falls 7.5% to 925. Revenue goes from 40,000 to 42,550, a rise of about 6.4%.
9. Any two of: more or closer substitutes, a luxury rather than a necessity, a large proportion of income, a longer time period, a narrower definition of the good.
10. The percentage changes differ at each point. A given price change is a small percentage at a high price and a large percentage at a low price, and the opposite holds for quantity.

Where marks are usually lost

• Calculating elasticity from absolute changes, not percentage changes.
• Dropping the sign on YED and XED, and so missing the classification.
• Saying a price change shifts the demand curve.
• Calling demand “elastic” when the size is between 0 and 1.
• Stating the revenue rule without saying whether price rose or fell.
• Giving a definition without applying it to the numbers or context in the question.
• Leaving an evaluation point undeveloped, for example “it depends on costs” with no reason.
• Treating a substitute as a complement, or the reverse, when reading a sign.

Official syllabus

Source: the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, Oxford International AQA Examinations. Sections covered: 3.1.2.1 and 3.1.2.2, with QS2 and QS8 from 3.5.