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

Introduction

This lesson focuses on Section 1.2.3 of the Pearson Edexcel A Level Economics A specification: Price, Income and Cross Elasticities of Demand. It sits within Theme 1, How Markets Work, and builds analytical tools that students will revisit in later macroeconomic and microeconomic contexts.

Elasticity isn’t just a mathematical tool here. It helps students explore real-world decision-making from the perspective of both consumers and producers. Grasping how demand responds to changes in price, income, or related goods sets the foundation for more advanced evaluation tasks throughout the course.

Key Concepts

Students need to understand and apply the following:

• Price Elasticity of Demand (PED):

  • Definition and formula: % change in Qd / % change in price.

  • Values: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic.

  • Relationship with total revenue.

• Income Elasticity of Demand (YED):

  • Definition and formula: % change in Qd / % change in income.

  • Goods classification: inferior (<0), normal (>0), luxury (>1).

  • Significance during economic cycles.

• Cross Elasticity of Demand (XED):

  • Definition and formula: % change in Qd of good A / % change in price of good B.

  • Identifying substitutes (XED > 0) and complements (XED < 0).

  • Use in market strategy and forecasting.

• Factors influencing elasticity:

  • Availability of substitutes

  • Necessity vs luxury

  • Time

  • Proportion of income spent

• Application in policy and business:

  • Taxation and subsidies

  • Pricing strategies

  • Economic forecasting and market segmentation

Real-World Relevance

Elasticity plays out in nearly every consumer market. For instance:

• Fuel pricing: PED for petrol is typically inelastic in the short term, which is why governments can raise fuel duty with minimal impact on consumption.

• Fast fashion vs luxury goods: ASOS items often show elastic demand, while Chanel bags demonstrate luxury good traits (YED > 1).

• Streaming wars: A price hike at Netflix may cause demand to fall if Disney+ or Prime Video are seen as close substitutes (high positive XED).

Encouraging students to explore their own consumer habits or local businesses can turn theory into something tangible.

How It’s Assessed

Elasticity is a core exam skill, appearing in both quantitative and evaluative formats. Students may encounter:

• Calculation questions: Use of the elasticity formulas with supplied data.

• Graph interpretation: Understanding curve shapes or shifts with elasticity in mind.

• Short-answer and data response: Explaining the implications of elasticities in context.

• Essay-style responses: For example, evaluating whether an indirect tax will reduce consumption effectively.

Command words to look out for:

• Calculate, Explain, Analyse, Evaluate – each requires a different level of depth and application.

Enterprise Skills Integration

This topic naturally lends itself to:

• Problem-solving: Analysing how firms might adapt pricing in response to economic changes.

• Decision-making: Evaluating whether to raise or lower prices, based on elasticity and revenue outcomes.

• Numeracy and critical thinking: Working with percentages, interpreting graphs, and drawing conclusions from data.

Try a classroom scenario: give students a fictional product with different elasticity values and market conditions. Have them work in teams to decide pricing and justify their choices.

Careers Links

Elasticity underpins many job functions and links clearly to Gatsby Benchmarks 4, 5, and 6:

• Marketing and pricing analysts use elasticity data to set optimal prices.

• Economists and policy advisors assess tax impacts on demand.

• Retail buyers and business strategists use YED and XED to forecast trends.

Students interested in careers in consultancy, finance, retail, or government policy will return to these concepts often.

Teaching Notes

Tips for delivery:

• Start with price elasticity using everyday items (e.g. coffee, cinema tickets).

• Use class polls to gather data and calculate elasticity in real time.

• Introduce YED and XED through real brand comparisons (e.g. Tesco vs Waitrose, Coke vs Pepsi).

Common pitfalls:

• Confusing signs in elasticity (especially XED). Reinforce the importance of interpreting direction and magnitude.

• Assuming a fixed elasticity for all goods – remind students elasticity varies over time and context.

Extension activities:

• Compare elasticity before and after a major event (e.g. lockdown effects on travel or entertainment).

• Research task: students investigate a firm’s pricing strategy and present how elasticity might shape their approach.