OxfordAQA International AS and A-level Economics: Demand and the elasticities of demand (9640)

This guide follows OxfordAQA’s economics specification (9640, version 1.2), which applies to International AS papers from May/June 2021 and International A-level papers from May/June 2022. The unit is sections 3.1.2.1 (demand for goods and services) and 3.1.2.2 (price, income and cross elasticities of demand). Section 3.1 is International AS content, examined through Unit 1, and it also counts towards the International A-level. The quantitative skills in 3.5 (QS2 percentages and QS8 elasticity) can be assessed in any unit, so every calculation below shows its working.

Every figure here is invented and illustrative.

Links: course hub, printable checklist, revision notes, practice questions, the wider operation of markets guide and all free 10-minute diagnostics.

Outcomes to learn

Section	Outcome
3.1.2.1	Explain the factors that determine demand; describe a demand curve as the relationship between price and quantity demanded; explain what shifts the curve
3.1.2.2	Explain the meaning of price, income and cross elasticity of demand, and calculate and interpret numerical values
3.1.2.2	Link income elasticity to normal and inferior goods, and cross elasticity to substitutes and complements
3.1.2.2	Link price elasticity to firms’ total revenue (total expenditure)
3.1.2.2	Explain the factors that influence each elasticity

3.1.2.1 The demand for goods and services

Demand means the amount of a product that buyers want and can afford at each possible price during a stated period. A demand curve shows the relationship between price and quantity demanded. It slopes downward because a higher price usually means fewer buyers can afford it, and some buyers switch to alternatives.

Here is an invented demand schedule for sourdough loaves at a small bakery, following the equation Q = 140 − 20P, where P is the price in pounds and Q is loaves per day.

Price (£)	2	3	4	5	6
Quantity demanded	100	80	60	40	20

Diagram in words: price runs up the side and quantity along the bottom. The demand curve is a straight line running from (20 loaves, £6) at the top left to (100 loaves, £2) at the bottom right.

Movements and shifts

Only the good’s own price moves you along the curve. If the price rises from £4 to £5, quantity demanded contracts from 60 to 40. If the price falls, quantity demanded extends.

Any other influence moves the whole curve sideways. A rise in demand is a shift right: more is bought at every price. A fall is a shift left. If local incomes rise and the bakery sells 20 more loaves at each price, the equation becomes Q = 160 − 20P. At £4 the bakery now sells 80 loaves, a rise of 33.3% from 60.

The specification names these influences on spending decisions:

Factor	Effect on demand for a good
Price	Movement along the curve, not a shift
Income	Rise in income shifts demand right for normal goods and left for inferior goods
Wealth	Higher wealth tends to raise spending, particularly on goods that are costly or long-lasting
Price of substitutes	A rise in a rival’s price shifts demand for this good right
Price of complements	A rise in the price of a complement shifts demand for this good left
Individual preferences	A change in tastes shifts demand towards or away from the good

The specification also says that decisions are influenced by social and emotional factors. Examples are following a fashion because friends do, buying to signal status, habit, or comfort spending when feeling low. These change the amount people want at every price, so they shift the curve. Advertising works the same way when it changes preferences.

Common errors on demand

• Saying a price change “shifts” the curve. The good’s own price only moves you along it.
• Mixing up a fall in demand (a shift) with a contraction in quantity demanded (a movement).

3.1.2.2 Price elasticity of demand (PED)

PED gauges how strongly the amount bought reacts when the product’s own price changes.

PED = percentage change in quantity demanded ÷ percentage change in price

Percentage change = (new − original) ÷ original × 100. Work out each percentage first, then divide. The sign is normally negative, since a downward-sloping curve has price and quantity moving the opposite way.

Worked example 1: an elastic result

The bakery raises the price from £4 to £5, and quantity falls from 60 to 40.

• % change in price = (5 − 4) ÷ 4 × 100 = +25%
• % change in quantity = (40 − 60) ÷ 60 × 100 = −33.3%
• PED = −33.3 ÷ 25 = −1.33

At more than 1 in size, demand is price elastic: quantity falls by a bigger percentage than price rises.

Interpreting the value

PED (ignoring sign)	Description	Meaning
0	Perfectly inelastic	Quantity stays put whatever the price
Between 0 and 1	Inelastic	Quantity responds by a smaller percentage than price
Exactly 1	Unit elastic	Quantity and price change by equal percentages
Greater than 1	Elastic	Quantity responds by a larger percentage than price
Infinite	Perfectly elastic	Any price rise loses all demand

Worked example 2: an inelastic result

A local newspaper (invented figures) raises its price from £1.50 to £1.80. Weekly sales fall from 5,000 to 4,400.

• % change in price = 0.30 ÷ 1.50 × 100 = +20%
• % change in quantity = −600 ÷ 5,000 × 100 = −12%
• PED = −12 ÷ 20 = −0.6

Demand is price inelastic.

Elasticity changes along a straight-line curve

On the bakery’s demand curve, PED is not the same at every price. At a point on this curve, PED = 20 × P ÷ Q (the 20 is the slope term in Q = 140 − 20P). The sizes are:

Price (£)	2	3	4	5	6
Quantity	100	80	60	40	20
Size of PED at that point	0.40	0.75	1.33	2.50	6.00

Demand is inelastic at the low-price, high-quantity end and elastic at the high-price end. A straight line therefore has unit elasticity at only one point (here £3.50, 70 loaves).

Price elasticity and total revenue

Total revenue = price × quantity sold. It is the same amount as consumers’ total expenditure on the good.

For the bakery:

Price (£)	2	3	4	5	6
Total revenue (£)	200	240	240	200	120

If demand is…	A price rise makes revenue…	A price fall makes revenue…
Elastic	Fall	Rise
Inelastic	Rise	Fall
Unit elastic	Stay the same	Stay the same

In example 1, revenue falls from £240 (4 × 60) to £200 (5 × 40), a fall of 16.7%, which matches elastic demand. In example 2, revenue rises from £7,500 to £7,920, a rise of 5.6%, which matches inelastic demand.

You can predict a change from a given PED. With PED = −0.6, a 10% price rise cuts quantity by 6%. New revenue is 1.10 × 0.94 = 1.034 times the old, so revenue rises 3.4%. With PED = −2.5, a 10% price cut raises quantity by 25%. New revenue is 0.90 × 1.25 = 1.125 times the old, so revenue rises 12.5%.

The rule is reliable for small changes. For a large change, work out price × quantity before and after rather than relying on the PED alone.

Factors that influence PED

Factor	Effect
Availability and closeness of substitutes	More and closer substitutes make demand more elastic
Necessity or luxury	Necessities are less elastic, luxuries more elastic
Proportion of income spent	A small share of income makes demand less elastic
Time	Over a longer period consumers find alternatives, so demand becomes more elastic
Breadth of market definition	A single brand is more elastic than the product as a whole
Habit or addiction	Makes demand less elastic

Chain of reasoning: one bakery’s sourdough has close rivals, so a price rise sends buyers elsewhere and PED is high. Bread as a category has few outside substitutes, so PED is low.

Income elasticity of demand (YED)

YED measures how responsive demand is to a change in consumers’ income.

YED = percentage change in quantity demanded ÷ percentage change in income

The sign matters.

YED	Type of good	Reason
Positive	Normal good	Demand rises as income rises
Greater than 1	Normal and income elastic (often called a luxury)	Demand rises proportionally more than income
Between 0 and 1	Normal and income inelastic (often a necessity)	Demand rises proportionally less than income
Negative	Inferior good	Demand falls as income rises

Worked example 3

In Country A (invented), average monthly income rises from £1,200 to £1,320, which is +10%. Restaurant meals per household rise from 20 to 23, which is +15%.

YED = 15 ÷ 10 = +1.5. Restaurant meals are normal and income elastic.

Over the same change, bus journeys fall from 40 to 36, a fall of 10%, and income rose by 8%. YED = −10 ÷ 8 = −1.25, so bus journeys are inferior. Staple rice rising 2% when income rises 10% gives YED = +0.2, normal but income inelastic.

Firms use this for forecasting. If incomes are expected to grow 4%, a product with YED = +1.5 should see demand rise about 6%. A product with YED = −1.25 should see demand fall about 5%.

Factors that influence YED

The main factor is the nature of the good. Goods people buy more of as they become better off, such as meals out or holidays, have high positive YED. Basic items and cheap alternatives to a better product have low or negative YED. The income level matters too, because a good can be normal for poorer households and inferior for richer ones.

Cross elasticity of demand (XED)

XED measures how responsive demand for good X is to a change in the price of a different good Y.

XED = percentage change in quantity demanded of good X ÷ percentage change in the price of good Y

XED	Relationship	Reason
Positive	Substitutes	A dearer Y sends buyers to X
Negative	Complements	A dearer Y reduces demand for the good used with it
Close to zero	Unrelated	One price hardly affects the other

The size shows the strength. A large positive number means close substitutes.

Worked example 4: substitutes

The bakery raises its price from £4.00 to £4.40, which is +10%. A rival bakery’s weekly sales of baguettes rise from 200 to 230, which is +15%.

XED = 15 ÷ 10 = +1.5. The goods are fairly close substitutes.

Worked example 5: complements

A printer’s price rises from £200 to £210, which is +5%. Demand for its ink cartridges falls from 500 to 460, which is −8%.

XED = −8 ÷ 5 = −1.6. The goods are strong complements.

Factors that influence XED

The closeness of the link between two goods is the key factor. Brands in the same narrow market have high positive XED. Goods that must be used together have high negative XED. The breadth of definition matters too, because different brands of bread are closer substitutes than bread and potatoes.

Evaluating elasticity in context

Elasticity values are estimates. They assume the other influences on demand stay the same, but in practice incomes, tastes and rival prices change together. A short-run estimate can mislead because PED tends to rise over time. A firm that knows PED is inelastic still needs its costs: more revenue from a price rise may not lift profit if costs rise too. Say which elasticity a claim relies on, the size of the price change and the time period.

Common errors on elasticity

• Dividing absolute changes instead of percentage changes.
• Putting the figures the wrong way round, for example dividing price by quantity.
• Forgetting the sign on YED and XED, which carries the meaning.
• Saying “elastic” when the value is between 0 and 1.
• Using the PED rule for revenue on a large price change without checking price × quantity.

Official syllabus

The source is the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, published by Oxford International AQA Examinations: sections 3.1.2.1 and 3.1.2.2, with quantitative skills QS2 and QS8 from section 3.5. Check the current version on the OxfordAQA website.