OCR A-level Economics (H460) · Component 1 · Elasticity and the margin
Mini-Lesson
Elasticity
Every firm and every Chancellor wants the same number: if I change the price, what happens to the quantity? Elasticity is that number — and it decides who really pays a tax.
Work through each screen, answer the questions as you go (some are chains of reasoning, some are calculations) and collect ⭐ stars. Every calculation is worked through for you first. Press Start when you're ready.
PED · H460 2.6
Price elasticity of demand
Elasticity measures the responsiveness of one variable to a change in another. It is always a ratio of percentage changes, which makes it unit-free and comparable across markets.
PED = %Δ quantity demanded ÷ %Δ priceand %ΔX = (change in X ÷ original X) × 100
Because demand curves slope downward, PED is normally negative. Quote the sign — an answer of "2" where the mark scheme wants "−2" can cost you.
|PED| > 1 → elastic: quantity is proportionately more responsive than price (luxuries, goods with close substitutes).
PED = −10 ÷ 25 = −0.4 → |PED| < 1, so demand is price inelastic.
Calculate
Your turn — calculate PED
1A rail operator raises the fare from £20 to £25. Weekly passenger journeys fall from 4,000 to 3,600. Calculate the PED. Give your answer to 2 decimal places, including the sign.
Demand unit elastic → TR is at its maximum and unchanged by small price moves.
On a straight-line demand curve PED is not constant: it is elastic at high prices (top half), unit elastic at the midpoint, and inelastic at low prices (bottom half). So TR rises, peaks at the midpoint, then falls as you slide down the curve. This is why "just cut the price" is not universally good advice.
TR rose by £500 — exactly as PED = −0.4 (inelastic) predicts for a price rise.
Government use: the same logic explains why the Treasury taxes petrol, alcohol and tobacco. Inelastic demand means the tax raises a lot of revenue and loses relatively little quantity — but that also means it is a weak tool for changing behaviour, and it is regressive, hitting low-income households hardest as a share of income.
Calculate
Your turn — total revenue
3The rail operator above raised the fare from £20 to £25 and journeys fell from 4,000 to 3,600. Calculate the operator's new weekly total revenue. Enter the number only.
£
Hint: TR = P × Q = 25 × 3,600. (Old TR was 20 × 4,000 = £80,000 — so revenue rose, as inelastic demand predicts.)
Check
The pricing decision
4A firm cuts its price by 5% and finds its total revenue falls. What must be true?
YED · H460 2.6
Income elasticity of demand
YED = %Δ quantity demanded ÷ %Δ incomethe SIGN tells you the type of good; the SIZE tells you how sensitive it is
YED > 0 → normal good (demand rises with income).
YED > 1 → a luxury (income elastic): foreign holidays, restaurant meals, new cars.
Why firms care: a business whose products have high positive YED (airlines, jewellery) booms in an upswing and is savaged in a recession — so it should diversify, hold cash, or add an inferior-good product line. Supermarket value ranges grow precisely because a recession is happening.
Calculate
Your turn — calculate YED
5Real household income rises from £600 to £660 per week. Demand for budget supermarket ready meals falls from 50 to 44 per month. Calculate the YED to 1 decimal place, including the sign.
Hint: %ΔY = (60 ÷ 600) × 100 = +10%. %ΔQd = (−6 ÷ 50) × 100 = −12%. A negative YED means the good is inferior.
XED · H460 2.6
Cross elasticity of demand
XED = %Δ quantity demanded of good A ÷ %Δ price of good Bagain: read the SIGN first
XED > 0 → substitutes. Coffee dearer → tea demand rises. The bigger the value, the closer the substitutes.
The price of coffee rises by 4%; demand for tea rises by 2%.
XED = +2 ÷ +4 = +0.5 → positive, so substitutes — but weak ones (a 4% coffee rise moves tea only 2%).
Real use: the Competition and Markets Authority uses XED to define a market in a merger case. If two products have a high positive XED, they compete in the same market, and a merger between them reduces competition. If XED is near zero, they do not — so the merger may be waved through.
Calculate
Your turn — calculate XED
6The price of a games console falls by 8%. Demand for games for that console rises by 12%. Calculate the XED to 1 decimal place, including the sign.
Hint: XED = +12 ÷ −8. A negative XED confirms the two goods are complements — which is exactly why consoles are sold at little or no profit.
Check
Reading XED
7Two goods have an XED of +2.4. Which statement is correct?
PES · H460 2.6
Price elasticity of supply
PES = %Δ quantity supplied ÷ %Δ pricenormally positive, because the supply curve slopes upward
PES > 1 = elastic supply; PES < 1 = inelastic; PES = 0 = perfectly inelastic (a fixed stock: a Van Gogh, tonight's stadium seats).
Determinants of PES:
Time — the big one. In the momentary period supply is nearly fixed (PES ≈ 0); in the short run at least one factor is fixed, so supply is inelastic; in the long run all factors are variable and supply is elastic.
Spare capacity — idle machines and workers mean output can rise fast (elastic).
Stocks — goods that can be stockpiled (tinned food) have elastic supply; fresh fish does not.
Factor mobility — if labour and capital can be switched into the industry quickly, supply is elastic.
Barriers to entry — high barriers keep new firms out, making industry supply inelastic.
Worked example
Price rises from £20 to £24; quantity supplied rises from 600 to 660.
PES = 10 ÷ 20 = +0.5 → supply is inelastic (typical of agriculture in the short run).
Why this matters for tax incidence: the more inelastic side of the market bears more of an indirect tax. If demand is inelastic and supply elastic, the consumer pays most of it.
Calculate
Your turn — calculate PES
8The price of a crop rises from £250 to £300 per tonne. Quantity supplied rises from 8,000 to 8,800 tonnes. Calculate the PES to 1 decimal place.
9A sharp rise in the world price of coffee beans produces almost no extra output for three years, then a large increase. The best explanation is:
The margin · H460 2.7
The concept of the margin
Economics is a marginal subject. Agents do not ask "should I consume coffee?" but "should I consume one more cup?" The rule is universal: do it while marginal benefit ≥ marginal cost; stop when MB = MC.
Marginal value = change in the total ÷ change in the quantityMU = ΔTU ÷ ΔQ · MC = ΔTC ÷ ΔQ · MR = ΔTR ÷ ΔQ
Total utility (TU) is the total satisfaction from consuming a quantity of a good. Marginal utility (MU) is the extra satisfaction from one more unit. The law of diminishing marginal utility says MU falls as consumption rises — the first cold drink on a hot day is bliss, the fourth is a chore.
This is the microfoundation of the demand curve: because each extra unit is worth less to you, you will only buy it if the price falls. The demand curve is the marginal utility curve, measured in money. (And when MU turns negative, total utility actually falls.)
Worked example
Total utility from slices of pizza: 1 slice = 12 utils, 2 = 21, 3 = 27, 4 = 30, 5 = 30.
MU of the 2nd slice = 21 − 12 = 9. MU of the 4th = 30 − 27 = 3. MU of the 5th = 30 − 30 = 0 — total utility has peaked; a 6th slice would push MU negative.
Calculate
Your turn — marginal utility
10A consumer's total utility from cups of coffee is: 1 cup = 20 utils, 2 = 35, 3 = 45, 4 = 51. Calculate the marginal utility of the 3rd cup.
utils
Hint: MU = ΔTU ÷ ΔQ = 45 − 35.
Check
Significance of elasticity
11The government wants to reduce smoking and is told demand for cigarettes has a PED of −0.3. Which evaluation is strongest?
Sort it
Luxury, necessity or inferior?
Tap a good, then tap the YED category it belongs to.
💎 Luxury (YED > 1)
🍞 Necessity (0<YED<1)
📉 Inferior (YED < 0)
Match it
What does each elasticity value tell you?
Tap an item on the left, then its partner on the right.
Elasticity value
What it tells you
Recap
The big ideas to know
All elasticities are %Δ ÷ %Δ. Always compute each percentage change from the ORIGINAL value, then divide.