Price elasticities of demand and supply, income and cross elasticities of demand
H2 Economics - syllabus 9570, 2026
Measure how strongly buyers and sellers respond to changes in price, income and related prices, and use elasticity to explain revenue, price changes and policy.
- What elasticity measures
Elasticity measures how strongly quantity responds to a change in price, income or another good's price.
- Calculate and interpret PED
PED = % change in quantity demanded / % change in price. Above 1 is elastic; below 1 is inelastic.
- What makes demand elastic or inelastic?
Demand is more elastic with close substitutes, a big share of income, luxuries and more time.
- PED and total revenue
Raise the price if demand is inelastic; cut it if demand is elastic, and revenue rises.
- Slope is not elasticity
Along a straight demand curve, the slope is constant but PED changes: elastic at the top, inelastic at the bottom.
- Calculate and interpret PES
PES = % change in quantity supplied / % change in price. Above 1 is elastic; below 1 is inelastic.
- What makes supply elastic or inelastic?
Supply is more elastic with spare capacity, stocks, mobile inputs and more time.
- How elasticity decides price and quantity changes
When demand rises, inelastic supply means a big price rise and a small quantity rise.
- Using elasticity to make decisions
Firms and governments use elasticity estimates to set prices and taxes, but estimates are only a guide.
- Income elasticity of demand (YED)
YED shows how demand responds to income: positive for normal goods, negative for inferior goods.
- Cross elasticity of demand (XED)
XED shows how demand for one good responds to another good's price: positive for substitutes, negative for complements.
- From a demand shift to the final outcome
YED and XED predict the shift in demand; supply decides how much of it becomes more sales or higher prices.
- Model essay (a): why farm prices swing so much
A top 10-mark answer, written in about 20 minutes, links large, frequent shifts to inelastic demand and supply, and shows the price effect on a diagram.
- Model essay (b): how useful is elasticity to an airline?
A top 15-mark answer, written in about 30 minutes, shows how PED and YED guide fares and growth plans, then tests the estimates against real conditions.
- Case study practice: concert week
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
What you will be able to do
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
I can use price, income and cross elasticities to judge how large those changes will be.
Syllabus 9570, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply, income and cross elasticities of demand
Taught in What elasticity measures, Calculate and interpret PED, What makes demand elastic or inelastic?, PED and total revenue, Slope is not elasticity, Calculate and interpret PES, What makes supply elastic or inelastic?, How elasticity decides price and quantity changes, Using elasticity to make decisions, Income elasticity of demand (YED), Cross elasticity of demand (XED), From a demand shift to the final outcome, Model essay (a): why farm prices swing so much, Model essay (b): how useful is elasticity to an airline?, Case study practice: concert week
Original teaching notes