Edexcel IGCSE Economics (4EC1) · Section A: The Market System
Specification points
- Price elasticity of demand (PED) and its determinants.
- Price elasticity of supply (PES) and its determinants.
- The significance of elasticity for firms and governments.
Price elasticity of demand
PED measures how responsive quantity demanded is to a price change.
PED = percentage change in quantity demanded ÷ percentage change in price
- Elastic (greater than 1): quantity responds strongly.
- Inelastic (less than 1): quantity responds weakly.
Determinants: substitutes, whether the good is a necessity or luxury, the proportion of income spent, time, and habit.
Price elasticity of supply
PES measures how responsive quantity supplied is to a price change.
PES = percentage change in quantity supplied ÷ percentage change in price
Determinants: spare capacity, stock levels, time, and how easily production can change. Primary goods (crops) tend to have inelastic supply.
Key definitions
| Term | Definition |
|---|---|
| PED | Responsiveness of quantity demanded to a price change. |
| PES | Responsiveness of quantity supplied to a price change. |
Why elasticity matters
- PED and revenue: for an inelastic good, raising the price increases total revenue; for an elastic good it reduces revenue.
- Governments tax inelastic goods (like fuel) to raise revenue with little fall in quantity.
- Inelastic supply explains why commodity prices swing sharply.
Worked example
A rail company raises fares by 10% and passengers fall by 4%. PED = 4 ÷ 10 = 0.4 (inelastic), so total revenue rises — because commuters have few substitutes. This is why firms with inelastic demand can raise prices to boost revenue.
Common exam mistakes
- Dividing the formula the wrong way round.
- Saying a price rise always raises revenue — it depends on PED.
- Confusing PED and PES.
Exam technique
Calculate, then interpret elastic/inelastic and explain the effect on revenue or tax.
Quick revision
- PED = %ΔQd ÷ %ΔP; PES = %ΔQs ÷ %ΔP.
- Inelastic demand + price rise → revenue up.
- Primary goods: inelastic supply → volatile prices.