This mini-lesson covers Edexcel 1.2 The market: 1.2.1 demand, 1.2.2 supply, 1.2.3 markets (the interaction of supply and demand and how to read the diagram), 1.2.4 price elasticity of demand and 1.2.5 income elasticity of demand — including the calculations Edexcel expects you to perform under exam conditions.
Work through each screen, answer the questions as you go (multiple choice, calculations and sorting tasks) and collect ⭐ stars. Press Start when you are ready.
1.2.1 · Demand
What shifts the demand curve?
Demand is the quantity consumers are willing and able to buy at each price. A change in the good's own price causes a movement along the demand curve. Anything else causes a shift of the whole curve.
Prices of substitutes and complements: a fall in the price of a substitute shifts demand for your product left. A fall in the price of a complement (e.g. printers for ink) shifts demand for your product right.
Consumer incomes: higher real incomes shift demand for normal goods right, and for inferior goods left.
Fashions, tastes and preferences, advertising and branding, demographics (an ageing population, migration), external shocks (a pandemic, a war, a financial crisis) and seasonality.
Business relevance: a shift in demand changes the equilibrium price and quantity, and therefore the firm's revenue, its required capacity and its stock levels — the whole business must respond, not just the marketing department.
1.2.2 · Supply · 1.2.3 Markets
Supply, and the market in equilibrium
Supply is the quantity producers are willing and able to sell at each price. Supply shifts because of: changes in the costs of production (wages, raw materials, energy), new technology (shifts supply right), indirect taxes (shift supply left — they act like a cost), government subsidies (shift supply right) and external shocks (a harvest failure, a supply-chain breakdown).
An increase in demand (D → D₁) raises both equilibrium price and quantity. An increase in supply lowers price and raises quantity.
Equilibrium is where supply equals demand. Above it there is excess supply (surplus) and price falls; below it there is excess demand (shortage) and price rises.
Sort it
Which curve moves, and which way?
Tap a change, then tap the effect it has on the market.
⬆ Demand shifts right
⬇ Demand shifts left
➕ Supply shifts right
Quick check
Reading the diagram
?The government imposes a new indirect tax on a product. Assuming demand is unchanged, what happens in the market?
1.2.4 · Price elasticity of demand
Calculating price elasticity of demand (PED)
PED = % change in quantity demanded ÷ % change in pricePED for a normal downward-sloping demand curve is always negative. Quote the sign — Edexcel expects it.
|PED| > 1 — price elastic: quantity is proportionately more responsive than price. Cutting price raises total revenue.
|PED| < 1 — price inelastic: quantity is proportionately less responsive. Raising price raises total revenue.
|PED| = 1 — unitary elastic: total revenue is unchanged.
Determinants of PED: availability of close substitutes (the biggest factor), the necessity of the good, the proportion of income spent on it, brand strength and loyalty, whether purchase can be postponed, and the time period (demand is more elastic in the long run).
Worked example
A coffee brand raises price from £2.00 to £2.20. Weekly sales fall from 20,000 to 17,000 units.
PED = −15 ÷ 10 = −1.5 → price elastic, so this price rise should reduce total revenue.
Calculate
Your turn — PED
1A brand raises price from £2.00 to £2.20 and weekly sales fall from 20,000 to 17,000 units. Calculate the price elasticity of demand, to 1 decimal place. Include the minus sign.
Hint: %ΔQd = −15%, %ΔP = +10%. PED = −15 ÷ 10.
Calculate
Your turn — the revenue test
2Using the same figures, calculate the brand's new weekly total revenue after the price rise (17,000 units at £2.20), in £.
?In question 3, PED = −1. Revenue before the price cut was £20,000 and afterwards is 440 × £45 = £19,800. Which statement is the most accurate?
1.2.5 · Income elasticity of demand
Calculating income elasticity of demand (YED)
YED = % change in quantity demanded ÷ % change in real incomeThe sign tells you the type of good; the size tells you how sensitive demand is.
YED positive: a normal good. If YED > +1 it is income elastic — a luxury (restaurant meals, new cars, foreign holidays). If 0 < YED < +1 it is income inelastic — a necessity (bread, toothpaste).
YED negative: an inferior good — demand falls as incomes rise (own-label value ranges, bus travel, discount retailers).
Worked example
Average weekly income rises from £500 to £520. Sales of a premium ready-meal rise from 8,000 to 8,800 units.
% change in income = (20 ÷ 500) × 100 = +4% · % change in quantity = (800 ÷ 8,000) × 100 = +10%
Strategic use: a firm with a portfolio of income-elastic luxuries is highly exposed to the business cycle. Adding an inferior or value line (a negative-YED product) hedges the portfolio — sales of the value line rise in a recession while the luxury line falls.
Calculate
Your turn — YED
4Average weekly incomes rise from £500 to £520. Sales of a premium ready-meal rise from 8,000 to 8,800 units. Calculate the income elasticity of demand, to 1 decimal place.
Hint: %ΔY = +4%, %ΔQd = +10%. YED = 10 ÷ 4.
Match it
Interpret the elasticity value
Tap a value on the left, then the correct interpretation on the right.
Elasticity value
Interpretation
Quick check
YED in a recession
?Real incomes are forecast to fall by 3% next year. A supermarket sells a premium range (YED = +2.0) and a value range (YED = −0.6). What is the best-supported prediction?
1.2.4–1.2.5 · Evaluation
The limits of elasticity calculations
Elasticity is powerful, but at A-level you must evaluate it:
It is calculated from historic data and assumes ceteris paribus — all other factors constant. In reality rivals react, incomes change and tastes shift at the same time.
The value is only reliable for small changes around the observed price; it is not constant along the whole demand curve.
Revenue is not profit. A price cut that raises revenue also raises variable costs on the extra units — the real test is what happens to contribution.
Elasticities change over time: demand becomes more elastic as substitutes appear, and less elastic as the brand strengthens.
Top-band evaluation: elasticity data supports the decision but does not make it. Judgement depends on the reliability of the data, the strength of the brand, the reaction of rivals and the firm's objectives (revenue maximisation is not the same as profit maximisation).
Quick check
Revenue versus profit
?A firm with PED = −2.0 cuts its price by 10%, so sales volume rises 20% and revenue rises. Why might profit still fall?