How do the four elasticities measure responsiveness, and why do they matter for revenue, taxes and producers?
Elasticity: price, income and cross elasticity of demand and price elasticity of supply, their calculation and determinants, and the link between price elasticity of demand and total revenue.
An Eduqas A520 answer to the four elasticities, covering price, income and cross elasticity of demand and price elasticity of supply, how each is calculated and interpreted, their determinants, and the link between price elasticity of demand and total revenue.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
Eduqas wants you to define, calculate and interpret the four elasticities (PED, YED, XED and PES), explain what determines each, and use price elasticity of demand to predict the effect of a price change on a firm's total revenue. Elasticity is one of the most heavily examined quantitative skills, appearing in Component 1 multiple choice and Component 2 data response, so the formulas must be automatic.
Price elasticity of demand (PED)
The main determinants of PED are the availability of close substitutes (more substitutes means more elastic), whether the good is a necessity or a luxury (necessities are inelastic), the proportion of income spent on it (a bigger share means more elastic), the time period (demand is more elastic in the long run as buyers adjust), and whether the good is addictive or habitual (which makes it inelastic).
Income elasticity of demand (YED)
YED matters for firms forecasting sales over the economic cycle: demand for luxuries (foreign holidays, new cars) swings sharply with income, while demand for staples and inferior goods is more stable or even rises in a downturn.
Cross elasticity of demand (XED)
The size of XED shows how close the relationship is: a high positive value means strong substitutes (two brands of butter), while a large negative value means strong complements (consoles and their games).
Price elasticity of supply (PES)
Supply is more elastic when there is spare capacity, when stocks can be drawn down, when production can be scaled up quickly, and over longer time periods. Goods with long production lags (agricultural crops, mined minerals) have very inelastic supply in the short run.
PED and total revenue
This is why firms with pricing power and inelastic demand (utilities, addictive products) can raise prices to lift revenue, while firms in competitive markets with elastic demand dare not. It also explains why a government raises tobacco duty to boost revenue: demand is inelastic, so the yield is large.
Examples in context
- Tobacco and alcohol duties. Inelastic demand means higher duty raises substantial revenue and only modestly cuts consumption, the policy rationale for both taxes.
- Public transport fares. Commuter rail demand is fairly inelastic in the short run, so fare rises raise revenue but face political resistance.
- Smartphones and apps. Strong negative XED between handsets and their app ecosystems locks consumers into a platform, a key competition concern.
Try this
Q1. A good has a YED of . State what type of good this is and explain. [3 marks]
- Cue. Negative YED means an inferior good; demand falls as income rises (for example, supermarket value ranges).
Q2. Explain why the supply of agricultural products is often price-inelastic in the short run. [4 marks]
- Cue. Long production lags (a growing season), the difficulty of expanding output quickly, and dependence on weather and land all make short-run supply inelastic.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 2 20194 marksWhen the price of a monthly gym membership rises from to , the number of members falls from 2,000 to 1,820. Calculate the price elasticity of demand and state whether demand is elastic or inelastic.Show worked answer →
A short calculate question, the kind common in Component 2 data response. PED is the percentage change in quantity demanded divided by the percentage change in price.
Percentage change in quantity: . Percentage change in price: .
. The absolute value is less than 1, so demand is price-inelastic. Markers reward both percentage changes, the correct ratio with its minus sign, and the inelastic conclusion. Dropping the sign or inverting the ratio is the usual error.
Eduqas Component 3 (micro) 202012 marksEvaluate the importance of price elasticity of demand to a government deciding whether to raise the tax on cigarettes.Show worked answer →
A levels-of-response essay. Knowledge and application: define PED and explain that cigarettes have inelastic demand () because they are addictive and have few substitutes. Show on a diagram that an indirect tax shifts supply left and, with inelastic demand, most of the tax is passed to consumers as a higher price, so consumption falls only modestly while tax revenue rises substantially.
Analysis: develop the revenue and health effects, linking inelastic demand to a large tax yield and the consumer incidence of the tax.
Evaluation: weigh the regressive impact (the tax bears more heavily on low-income smokers), the risk of smuggling and a black market, and the long-run elasticity (demand is more elastic over time as habits change). Conclude with a supported judgement, for example that PED makes the tax an effective revenue raiser but a blunt instrument for cutting consumption.
Related dot points
- Demand, supply and the price mechanism: the determinants of demand and supply, movements versus shifts, market equilibrium and disequilibrium, and the rationing, signalling and incentive functions of prices.
An Eduqas A520 answer to demand and supply, covering the determinants of each, the difference between a movement and a shift, market equilibrium and disequilibrium (surpluses and shortages), and the rationing, signalling and incentive functions of the price mechanism.
- Scarcity, choice and opportunity cost: the basic economic problem, the factors of production, the production possibility frontier, and positive versus normative statements.
An Eduqas A520 answer to the basic economic problem, covering scarcity, choice and opportunity cost, the four factors of production, the production possibility frontier as a model of choice and economic growth, and the distinction between positive and normative statements.
- Consumer and producer surplus: their definition and measurement on a demand-and-supply diagram, how they change when price or the curves shift, and their use in welfare analysis.
An Eduqas A520 answer to consumer and producer surplus, covering their definition and measurement as areas on a demand-and-supply diagram, how each changes when price or the curves shift, the idea of total economic welfare, and how surplus analysis underpins evaluation of markets and intervention.
- Costs, revenues and profit: fixed and variable costs, marginal, average and total cost and revenue, the law of diminishing returns, normal and supernormal profit, and the profit-maximising condition.
An Eduqas A520 answer to business costs, revenues and profit, covering fixed and variable costs, the relationship between marginal, average and total measures, the law of diminishing returns, the distinction between normal and supernormal profit, and the profit-maximising rule that marginal revenue equals marginal cost.
Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)