AQA A-Level Economics (7136) · The Operation of Markets
Specification points
- Demand and supply, and the factors that shift them.
- Price, income and cross elasticities of demand (PED, YED, XED).
- Price elasticity of supply (PES).
Demand and supply
Demand slopes down; a change in own price is a movement along, while non-price factors (income, related goods, tastes, population) shift it. Supply slopes up; costs, technology, taxes/subsidies and the number of firms shift it.
Elasticities
| Measure | Formula | Key idea |
|---|---|---|
| PED | %ΔQd ÷ %ΔP | Responsiveness to price; determines revenue |
| YED | %ΔQd ÷ %Δincome | + normal, − inferior; luxuries > 1 |
| XED | %ΔQd of A ÷ %ΔP of B | + substitutes, − complements |
| PES | %ΔQs ÷ %ΔP | Higher with spare capacity, stocks and time |
Inelastic demand + a price rise → total revenue rises. Elastic demand + a price rise → total revenue falls.
Key definitions
| Term | Definition |
|---|---|
| PED | Responsiveness of quantity demanded to a change in price. |
| YED | Responsiveness of demand to a change in income. |
| PES | Responsiveness of quantity supplied to a change in price. |
Why elasticities matter
- PED guides firms' pricing and governments' tax revenue.
- YED helps predict how demand changes as incomes grow (important for producers of luxuries and inferior goods).
- XED identifies substitutes and complements.
- PES explains why commodity prices are volatile (inelastic short-run supply).
Worked example
A firm raises price by 5% and quantity demanded falls by 2%. PED = 2 ÷ 5 = 0.4 (inelastic), so total revenue rises — useful where demand is inelastic (few substitutes, necessity). A commodity with inelastic supply would see a large price swing after any demand change.
Common exam mistakes
- Confusing a movement along with a shift.
- Getting the revenue effect of elasticity wrong.
- Mixing up the four elasticities.
Exam technique
Calculate then interpret each elasticity for a real decision, and use fully labelled diagrams.
Quick revision
- PED, YED, XED, PES — learn formulas and signs.
- Inelastic demand + price rise → revenue up.
- Own price → movement; other factors → shift.