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How responsive is the quantity demanded or supplied to a change in price?

Price elasticity of demand and supply, how to calculate and interpret it, the factors affecting it, and the link between elasticity and total revenue.

An OCR J205 answer on price elasticity of demand and supply: the formulae, how to calculate and interpret values, the factors affecting elasticity, and the link to total revenue.

Generated by Claude Opus 4.810 min answer

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  1. What this dot point is asking
  2. Price elasticity of demand
  3. Worked PED calculation
  4. Factors affecting PED
  5. Price elasticity of supply
  6. Elasticity and total revenue
  7. Try this

What this dot point is asking

OCR wants you to define and calculate price elasticity of demand (PED) and price elasticity of supply (PES), interpret whether a good is elastic or inelastic, explain the factors that affect elasticity, and link PED to a firm's total revenue. This is a core quantitative skill in J205/01.

Price elasticity of demand

PED is normally negative (price and quantity move in opposite directions), so we judge it by its size ignoring the sign:

  • size of PED>1PED > 1: demand is elastic (quantity responds a lot).
  • size of PED<1PED < 1: demand is inelastic (quantity responds a little).
  • size of PED=1PED = 1: demand is unit elastic.

Worked PED calculation

Factors affecting PED

Demand is more elastic (more responsive) when:

  • there are many close substitutes,
  • the good takes a large share of income,
  • the good is a luxury rather than a necessity,
  • buyers have time to adjust.

Demand is more inelastic when the good is a necessity, has few substitutes, is habit-forming, or takes a small share of income.

Price elasticity of supply

PES=percentage change in quantity suppliedpercentage change in pricePES = \frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}}

Supply is more elastic when firms have spare capacity, can store stock, or have time to expand; it is more inelastic when production takes a long time (such as farming) or factors are hard to obtain quickly.

Elasticity and total revenue

Total revenue is price times quantity sold: TR=P×QTR = P \times Q. PED tells a firm what happens to revenue when it changes price:

For example, raising the price of a good from £10\pounds 10 (selling 100, TR=£1,000TR = \pounds 1{,}000) to £12\pounds 12 where quantity falls only to 95 gives TR=12×95=£1,140TR = 12 \times 95 = \pounds 1{,}140: revenue rose because demand was inelastic.

Try this

Q1. Define price elasticity of demand. [2 marks]

  • Cue. The percentage change in quantity demanded divided by the percentage change in price.

Q2. A firm sells a good with elastic demand. Explain what it should do to its price to raise total revenue. [3 marks]

  • Cue. Cut the price: quantity demanded rises by a larger percentage than price falls, so total revenue rises.

Exam-style practice questions

Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

OCR J205/01 20194 marksThe price of a good rises from £20\pounds 20 to £25\pounds 25 and quantity demanded falls from 400 to 360 units. Calculate the price elasticity of demand and state whether demand is elastic or inelastic.
Show worked answer →

A Calculate question. Percentage change in quantity demanded is 360−400400×100=−40400×100=−10%\frac{360 - 400}{400} \times 100 = \frac{-40}{400} \times 100 = -10\%. Percentage change in price is 25−2020×100=520×100=+25%\frac{25 - 20}{20} \times 100 = \frac{5}{20} \times 100 = +25\%.

PED=−1025=−0.4PED = \frac{-10}{25} = -0.4. The size (ignoring the sign) is 0.40.4, which is less than 1, so demand is price inelastic.

Markers reward the two percentage changes, the correct division, and the judgement that a value below 1 in size means inelastic demand.

OCR J205/01 20216 marksExplain why a firm selling a good with price inelastic demand might raise its price, and what would happen to its total revenue.
Show worked answer →

A 6 mark question linking elasticity to revenue.

When demand is price inelastic (size of PED below 1), a price rise causes a smaller percentage fall in quantity demanded. So the higher price more than makes up for the small drop in sales, and total revenue rises.

This is why firms selling necessities or goods with few substitutes (such as petrol or some medicines) can raise prices to increase revenue. Markers reward the inelastic definition, the reasoning that quantity falls by less than price rises, and the conclusion that total revenue increases.

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