Syllabus: AQA - AS and A Level Economics
Module: 3.1.2 Price Determination in a Competitive market
Lesson: 3.1.2.2 Price Income and Cross Elasticities of Demand

Introduction

This lesson supports AQA’s AS and A Level Economics curriculum, specifically section 3.1.2.2 – Price, Income and Cross Elasticities of Demand. It sits within the broader topic of Price Determination in a Competitive Market and builds the quantitative and analytical skills students need for success in microeconomics.

Understanding elasticity allows students to explain why demand changes in different contexts – not just in theory, but in the real world of pricing decisions, business strategy and consumer behaviour. This part of the specification is particularly rich in links to business, policy and everyday economic choices, making it highly engaging for applied learning.

Key Concepts

According to the AQA specification, students need to:

• Calculate:

  • Price elasticity of demand (PED)

  • Income elasticity of demand (YED)

  • Cross elasticity of demand (XED)

• Interpret numerical values:

  • PED: Elastic, inelastic, unitary

  • YED: Inferior, normal, luxury

  • XED: Substitutes (positive), complements (negative)

• Explain relationships:

  • Between PED and total revenue

  • Between YED and economic sectors

  • Between XED and interrelated markets

• Understand influencing factors:

  • Availability of substitutes, necessity vs luxury, time period, definition of market

These skills directly contribute to students’ ability to model and evaluate economic behaviour in varied contexts.

Real-World Relevance

Elasticity plays out in the news and in business decisions every day. For example:

• Price Elasticity: When rail fares rise, why does usage fall only slightly? Rail travel has few substitutes for commuters – demand is price inelastic.

• Income Elasticity: In a cost-of-living crisis, sales of luxury handbags fall but demand for supermarket own-brands rises. This shows how different products react to changes in income.

• Cross Elasticity: A drop in Netflix’s subscription price may reduce demand for cinema tickets – they’re substitute goods. Conversely, a cut in printer prices might raise demand for ink cartridges – complementary goods.

Introducing elasticity through scenarios like these helps students see economics as a way of making sense of the world around them.

How It’s Assessed

In AQA AS and A Level exams:

• Command words like calculate, explain, analyse, and evaluate are frequently used. Students should be confident with both numerical questions and extended writing.

• Quantitative tasks may require use of elasticity formulae:

  PED=% change in quantity demanded% change in price\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} PED=% change in price% change in quantity demanded​

• Graphical analysis is often expected – drawing or interpreting demand curves and elasticity zones.

• Data response questions test application to real-world contexts. For example, “Assess the impact on revenue if a business raises prices for an inelastic good.”

Teaching should build confidence with both short-form calculations and long-form essay responses involving chains of reasoning.

Enterprise Skills Integration

This topic is a natural bridge between theory and enterprise. Students develop:

• Decision-making: Should a business raise prices? It depends on elasticity – a core skill in commercial strategy.

• Numeracy and analysis: Applying formulae, interpreting coefficients, and using graphs.

• Critical thinking: Understanding trade-offs – e.g. increased revenue vs customer loss.

• Real-time reasoning: Elasticity underpins tactical responses to market changes – vital in Enterprise Skills’ simulations.

If using Enterprise Skills Business Simulations, you can link this lesson to pricing strategy decisions and their simulated outcomes — turning theory into active problem-solving.

Careers Links

Elasticity isn’t just an exam concept – it shows up in real roles:

• Retail Analysts use YED to forecast how changing income levels affect product ranges.

• Marketing Executives consider XED when planning promotions or partnerships.

• Policy Advisors examine PED when recommending taxes on goods like tobacco or sugar.

This content supports Gatsby Benchmarks 4, 5 and 6, helping students connect curriculum to careers, experience real decision-making, and engage with employer-relevant skills.

Teaching Notes

• Common misconceptions: Students often mix up XED and YED or forget to interpret the sign of the coefficient. Use sentence starters like “A positive XED means…” to encourage clarity.

• Time-saving tip: Use real product data (e.g. coffee shop price lists) for quick, plug-and-play elasticity tasks.

• Extension activity: Ask students to investigate the elasticity of a product they buy regularly and present their findings – linking personal habits to economic theory.

• Scaffolded support: Provide a step-by-step structure for calculations, including worked examples and guided practice before moving to applied tasks.

• Stretch and challenge: Introduce debates such as “Should governments tax price inelastic goods?” to develop evaluative writing.

Elasticity provides a practical, syllabus-aligned opportunity to learn by doing. Whether students are working out how pricing affects a business or exploring market dynamics, this topic deepens understanding and applies directly to their futures.