Syllabus: Pearson - AS Level Economics
Module: 1.2 How Markets Work
Lesson: 1.2.3 Price Income and Cross Elasticities of Demand

Introduction

This topic sits within Theme 1 of the Pearson Edexcel AS Level Economics A specification and focuses on how elasticity helps us understand consumer behaviour and market dynamics. Students build on their understanding of demand by diving deeper into how responsive it is to changes in price, income, and the price of related goods.

For teachers and SLT, this section offers not only core microeconomic content but also a springboard for real-world application, decision-making analysis, and synoptic links across the course. Careers leads will find it rich with employability relevance, while headteachers will recognise how it supports curriculum depth and measurable outcomes.

Key Concepts

Aligned to the Pearson Edexcel specification, students need to be able to:

• Define and understand:

  • Price elasticity of demand (PED)

  • Income elasticity of demand (YED)

  • Cross elasticity of demand (XED)

• Use formulae to calculate each elasticity:

  • % change in quantity demanded ÷ % change in price/income/price of other good

• Interpret numerical values:

  • PED: elastic (>1), inelastic (<1), unitary (=1)

  • YED: negative (inferior), positive (normal), highly positive (luxury)

  • XED: positive (substitutes), negative (complements), zero (unrelated)

• Understand and explain:

  • The determinants of each elasticity

  • The implications for firms (pricing strategy, revenue forecasting)

  • The implications for government (tax policy, subsidies, income shifts)

Real-World Relevance

Elasticity isn’t just academic. It explains everyday pricing and policy decisions. For example:

• Transport: Rail fares often rise above inflation. If demand is inelastic, revenue increases. But when fuel prices fall, many shift back to car travel, showing a cross elasticity effect.

• Luxury goods: During economic booms, high-end retail sees a sharp rise in demand (high YED). In recessions, demand drops off quickly.

• Tobacco taxes: Governments rely on PED estimates to predict tax revenue and public health impacts. Demand tends to be inelastic, but over time, behavioural change can shift this.

Mini case study:
When Netflix raised its prices in 2022, subscriber numbers dipped in North America but rose globally. This hinted at regional variations in PED — influenced by available substitutes, income levels, and consumer habits.

How It’s Assessed

Elasticity regularly features in Paper 1, and sometimes synoptically in Paper 3. Common assessment formats include:

• Calculation tasks using elasticity formulae

• Short-answer questions requiring definition and interpretation

• Data response using elasticity figures in context

• Extended evaluation on the implications of elasticity for firms or governments

Command words to focus on: Calculate, Explain, Analyse, Evaluate.
Students must show clear working in calculations and support evaluative points with context and logic.

Enterprise Skills Integration

This topic builds several core enterprise skills:

• Problem-solving: Analysing pricing decisions based on elasticity data

• Decision-making: Choosing whether to raise/lower price or invest in a product based on likely demand changes

• Numeracy: Working fluently with percentages and formulae

• Communication: Explaining the logic behind pricing or policy decisions clearly and persuasively

A simple classroom activity:
Give students elasticity data for three products. Ask them to act as retail managers and present pricing recommendations based on predicted revenue outcomes.

Careers Links

This section links directly to Gatsby Benchmarks 4 and 5:

• Marketing roles: Elasticity guides product pricing and promotional strategy

• Government and policy: Taxation and subsidy policies rely on elasticity estimates

• Retail management: Revenue forecasting and product bundling involve understanding XED

• Data analysis: Economists and analysts use elasticity to model market behaviour

Students aspiring to roles in business, consultancy, public policy, or market research will find this foundational.

Teaching Notes

Tips for delivery:

• Start with intuitive examples (e.g. chocolate vs petrol) to anchor concepts before applying formulae.

• Use elastic/inelastic product cards for sorting tasks.

• Link back to demand curves to reinforce the visual understanding.

Common pitfalls:

• Confusing direction of change: Emphasise signs (positive/negative) and what they tell us.

• Rote learning of definitions without understanding implications.

• Misinterpreting percentage changes — reinforce maths skills alongside economics content.

Stretch ideas:

• Compare PED across countries or income brackets using case studies.

• Introduce students to behavioural economics perspectives — when elasticity doesn’t behave as expected.

Saves planning time:
Use real market data (ONS, company reports) to build applied tasks that also strengthen exam fluency.