Edexcel A-Level Economics A (9EC0) · Theme 1
Specification points
- Rational decision-making; demand and the factors affecting it.
- Price, income and cross elasticities of demand (PED, YED, XED).
- Supply and the factors affecting it; price elasticity of supply (PES).
- Price determination and the price mechanism.
- Consumer and producer surplus; the impact of indirect taxes and subsidies.
Demand and supply
Demand slopes downwards (law of demand); a change in own price is a movement along, while non-price factors (income, related goods, tastes, population, expectations) shift the curve. Supply slopes upwards; costs, technology, taxes/subsidies and the number of firms shift it. Equilibrium is where demand equals supply; surpluses and shortages self-correct through price.
Elasticities
| Measure | Formula | Key idea |
|---|---|---|
| PED | %ΔQd ÷ %ΔP | Responsiveness to price; determines revenue effect |
| YED | %ΔQd ÷ %Δincome | + normal, − inferior; luxuries > 1 |
| XED | %ΔQd of A ÷ %ΔP of B | + substitutes, − complements |
| PES | %ΔQs ÷ %ΔP | Responsiveness of supply; higher with spare capacity and time |
Inelastic demand + a price rise → total revenue rises. Elastic demand + a price rise → total revenue falls.
Key definitions
| Term | Definition |
|---|---|
| Consumer surplus | The difference between the price consumers would pay and the price they actually pay. |
| Producer surplus | The difference between the price producers receive and the minimum they would accept. |
| Price mechanism | How prices signal, incentivise and ration to allocate resources. |
The price mechanism
Prices perform three functions: signalling relative scarcity, giving incentives to producers, and rationing scarce goods. Together these reallocate resources between markets without central direction.
Surplus, taxes and subsidies
- Consumer surplus and producer surplus together measure welfare in a market.
- An indirect tax shifts supply left, raising price and reducing quantity; the incidence falls more on the more inelastic side.
- A subsidy shifts supply right, lowering price and raising quantity, at a cost to the government.
Worked example
A government places a specific tax on fuel. Supply shifts left by the tax per unit; price rises and quantity falls. Because demand for fuel is price-inelastic, consumers bear most of the burden and tax revenue is high — but the policy is regressive, hitting lower-income drivers hardest.
Common exam mistakes
- Confusing a movement along with a shift.
- Forgetting to link tax incidence to elasticity.
- Mislabelling consumer and producer surplus on diagrams.
Exam technique
Always calculate elasticities and *interpret* the result for a real decision (pricing, revenue, tax). Use fully labelled diagrams to show surplus changes from taxes and subsidies.
Quick revision
- PED, YED, XED, PES — learn formulas and interpretations.
- Price mechanism: signal, incentive, ration.
- Tax → S left; subsidy → S right; incidence on the inelastic side.