Calculate and interpret price elasticity of demand and supply, distinguish elastic from inelastic responses, explain the factors that determine elasticity, and link elasticity of demand to total revenue.

What this dot point is asking

Elasticity is the main calculation skill in CCEA GCSE Economics, so you must be able to do the arithmetic and interpret it. You need the formula for price elasticity of demand (PED) and price elasticity of supply (PES), the difference between elastic and inelastic responses, the factors that make demand or supply more or less elastic, and the link between PED and a firm's total revenue. This is Section 1 quantitative content and is where calculation marks are won or lost.

What elasticity measures

Elasticity measures how responsive one thing is to a change in another. Price elasticity of demand (PED) measures how responsive the quantity demanded is to a change in the good's price. Price elasticity of supply (PES) measures how responsive the quantity supplied is to a price change. Both turn the vague idea "a bit" or "a lot" into a number.

The formula for PED is:

PES uses the same structure with quantity supplied on top. Because demand falls when price rises, PED is normally negative, so we judge its size (ignoring the minus sign).

Elastic and inelastic

The size of the elasticity tells you the type of response.

• Elastic demand has a size greater than 1: quantity changes by proportionally more than price. A small price rise causes a large fall in quantity.
• Inelastic demand has a size less than 1: quantity changes by proportionally less than price. Even a large price rise causes only a small fall in quantity.
• Unit elastic demand has a size of exactly 1: quantity changes in the same proportion as price.

The same labels apply to supply, measuring how easily producers can change output when price changes.

What determines elasticity

CCEA expects you to explain why some goods are more elastic than others.

Demand tends to be more elastic when:

• there are close substitutes, so buyers can easily switch to a rival good;
• the good is a luxury rather than a necessity, so it can be done without;
• it takes a large share of income, so a price change is keenly felt;
• there is time to adjust, as buyers find alternatives in the long run.

Demand tends to be inelastic for necessities, goods with few substitutes, addictive goods, and goods that take only a tiny share of income (such as salt). Supply is more elastic when firms have spare capacity, can store stock, or have time to expand; it is inelastic for goods that take a long time to produce, such as crops or housing.

Elasticity and total revenue

The most useful application of PED is its effect on a firm's total revenue (price multiplied by quantity sold). The rule is simple but powerful.

If demand is inelastic, price and total revenue move in the same direction: raising price raises revenue, because the fall in quantity is proportionally smaller than the rise in price. If demand is elastic, price and total revenue move in opposite directions: raising price lowers revenue, because the fall in quantity is proportionally larger. This is why firms with inelastic demand (such as rail or tobacco) can raise prices to earn more, while firms facing elastic demand dare not.

Why this matters

Elasticity is where market analysis becomes precise and where the calculation marks are. Firms use PED to set prices; governments use it to predict the effect of a tax (a tax on an inelastic good, such as petrol, raises a lot of revenue and barely cuts consumption). It links directly to total revenue, market failure and government policy later in the course, so secure arithmetic and a clear elastic-versus-inelastic judgement pay off across the whole specification.