Pearson Edexcel · A-Level · Economics B

    Course version: 9EB0 · Version from Sept 2015

    Quantitative skills: QS 8: make calculations of elasticity and interpret…

    Full specification wording

    Appendix 3: Quantitative skills: QS 8: make calculations of elasticity and interpret the result

    Elasticity measures the responsiveness of quantity demanded or supplied to a change in a variable like price or income.

    Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .

    • Point 7 of 7
    • 4 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    Elasticity measures the responsiveness of quantity demanded or supplied to a change in a variable like price or income. To calculate it, divide the percentage change in quantity by the percentage change in the determining variable. If a 10% price increase causes a 15% fall in quantity demanded, Price Elasticity of Demand (PED) is -15% / 10% = -1.5. Interpreting the result requires analysing the sign and magnitude. A PED of -1.5 is price elastic because the absolute value exceeds 1, meaning demand is highly responsive. For Income Elasticity (YED) and Cross Elasticity (XED), the sign is crucial: a positive YED indicates a normal good, while a positive XED signifies substitutes. This informs business pricing strategies.

    What earns the marks

    • Calculate the percentage change in quantity and the percentage change in the determining variable (price, income, or price of another good).
    • Apply the correct elasticity formula by dividing the percentage change in quantity by the percentage change in the other variable.
    • State the final elasticity coefficient with the correct positive or negative sign.
    • Interpret the coefficient to classify the good (e.g., price elastic, normal, inferior, substitute, or complement) and explain the implications for revenue.

    Common mistakes and how to put them right

    • Inverting the formula by dividing the change in price by the change in quantity.

      Put it right: Ensure the percentage change in quantity is the numerator.

    • Ignoring the negative sign for Price Elasticity of Demand.

      Put it right: Include the sign to demonstrate the inverse relationship between price and quantity demanded.

    • Misinterpreting a YED between 0 and 1 as an inferior good.

      Put it right: A positive YED less than 1 indicates a normal necessity, while a negative YED indicates an inferior good.

    Exam tips

    • When calculating percentage changes, always use the original value as the denominator: (Change / Original) × 100.
    • Use the absolute value of PED to determine if demand is elastic (>1) or inelastic (<1), but always write down the negative sign in your final answer.
    • Link your elasticity calculation to business decisions, such as whether to raise or lower prices to maximise total revenue.

    Try the lesson

    The start of the Appendix 3: Quantitative skills: QS 8: make calculations of elasticity and interpret the result lesson, made from checked teaching notes for this specification point.

    Have a go first

    A firm increases the price of its product by 10%, which leads to a 15% decrease in the quantity demanded. What is the price elasticity of demand (PED) for this product?

    Listen

    Elasticity measures the responsiveness of quantity demanded or supplied to a change in a variable like price or income. To calculate it, divide the percentage change in quantity by the percentage change in the determining variable. If a 10% price increase causes a 15% fall in quantity demanded, Price Elasticity of Demand (PED) is -15% / 10% = -1.5. Interpreting the result requires analysing the sign and magnitude. A PED of -1.5 is price elastic because the absolute value exceeds 1, meaning demand is highly responsive. For Income Elasticity (YED) and Cross Elasticity (XED), the sign is crucial: a positive YED indicates a normal good, while a positive XED signifies substitutes. This informs business pricing strategies. A strong answer earns marks for these points. Calculate the percentage change in quantity and the percentage change in the determining variable (price, income, or price of another good). Apply the correct elasticity formula by dividing the percentage change in quantity by the percentage change in the other variable. State the final elasticity coefficient with the correct positive or negative sign. Interpret the coefficient to classify the good (e.g., price elastic, normal, inferior, substitute, or complement) and explain the implications for revenue. Exam tip: When calculating percentage changes, always use the original value as the denominator: (Change / Original) × 100.

    See it

    A top-down flowchart. Two starting nodes, 'Percentage change in quantity' and 'Percentage change in price, income or price of another good', both lead into 'Divide by percentage change in determining variable'. This leads to 'Elasticity coefficient with sign', which leads to 'Interpret sign and magnitude'. From that interpretation node, four branches lead to 'PED: absolute value above 1 means price elastic', 'YED: positive means normal good', 'XED: positive means substitutes', and 'Informs business pricing strategies'.
    Shows how percentage changes in quantity and the determining variable combine into an elasticity coefficient, which is then interpreted to classify the good and inform pricing strategy.

    Key words

    Say what each word means before you turn the card.

    Price elasticity of demand

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    Income elasticity of demand

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    Cross elasticity of demand

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    Business revenue and pricing

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    See every definition
    Price elasticity of demand
    Calculated by dividing the percentage change in quantity demanded by the percentage change in price, and is price elastic when the absolute value exceeds 1.
    Income elasticity of demand
    Calculated by dividing the percentage change in quantity by the percentage change in income, where a positive result indicates a normal good.
    Cross elasticity of demand
    Calculated by dividing the percentage change in quantity by the percentage change in the price of another good, where a positive result signifies substitutes.
    Business revenue and pricing
    Elasticity informs business pricing strategies, including whether to raise or lower prices to maximise total revenue.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. Two starting nodes, 'Percentage change in quantity' and 'Percentage change in price, income or price of another good', both lead into 'Divide by percentage change in determining variable'. This leads to 'Elasticity coefficient with sign', which leads to 'Interpret sign and magnitude'. From that interpretation node, four branches lead to 'PED: absolute value above 1 means price elastic', 'YED: positive means normal good', 'XED: positive means substitutes', and 'Informs business pricing strategies'.

    • 1Box 1

    • 2Box 2

    • 3Box 3

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