VCE Economics — Unit 3 AOS 1
Elasticity — Flashcards & Quiz
Elasticity measures how responsive quantity is to a change in price and is a foundational tool in VCE Economics Unit 3 AOS 1. You need to calculate price elasticity of demand and supply using the percentage formula, classify outcomes as elastic, inelastic or unit elastic, and explain the determinants — substitutes, necessity, share of income, time horizon. Examiners reward the link to total revenue: a price rise increases revenue when demand is inelastic and reduces it when elastic. Practise reading from a curve as well as from a table.
Key Points
- Price elasticity of demand (PED) = %ΔQd / %ΔP. It measures how responsive quantity demanded is to a price change.
- Inelastic (|PED| < 1): quantity changes proportionally less than price. Necessities, no substitutes, small share of income.
- Elastic (|PED| > 1): quantity changes proportionally more than price. Luxuries, many substitutes, large share of income, long time horizon.
- Unit elastic (|PED| = 1): proportional changes match; total revenue stays constant.
- Revenue link: inelastic demand → price RISE increases total revenue; elastic demand → price FALL increases total revenue.
- Price elasticity of supply (PES) works the same way: >1 elastic (easy to produce more), <1 inelastic (capacity-constrained).
Common Mistakes to Avoid
- Confusing inelastic (|PED| < 1) with elastic (|PED| > 1).
- Forgetting the negative sign of PED for ordinary goods (price and quantity move in opposite directions).
- Mixing up the revenue effect — price rise increases revenue for INELASTIC demand, not elastic.
- Confusing price elasticity with income elasticity or cross-elasticity.
- Ignoring the determinants (substitutes, necessity, time horizon) when predicting elasticity.
Exam Strategy
VCAA Unit 3 AOS 1 elasticity questions ask you to (1) calculate PED/PES from data, (2) predict elasticity from determinants, or (3) evaluate the revenue impact of a price change. Method: use the %Δ formula, classify as elastic/inelastic, apply to revenue via the inverse relationship, reference determinants to explain why.
Sample Flashcards
Q1: Define price elasticity of demand (PED) and what determines whether demand is elastic or inelastic.
PED measures the responsiveness of quantity demanded to a change in price. PED = %ChangeQd / %ChangeP. Elastic (PED > 1): Qd changes more than proportionally to price. Inelastic (PED < 1): Qd changes less than proportionally. Determinants: availability of substitutes, necessity vs luxury, proportion of income spent, time period, and brand loyalty.
Q2: Define price elasticity of supply (PES) and identify factors that influence it.
PES measures the responsiveness of quantity supplied to a change in price. PES = %ChangeQs / %ChangeP. Elastic (PES > 1) when firms can quickly increase output. Factors: spare capacity, availability of inputs, time period (longer = more elastic), ease of storing output, and length of production process.
Q3: Define income elasticity of demand (YED) and cross-price elasticity of demand (XED).
YED measures the responsiveness of demand to a change in income. Normal goods have positive YED; inferior goods have negative YED. XED measures the responsiveness of demand for good A to a change in the price of good B. Substitutes have positive XED; complements have negative XED.
Sample Quiz Questions
Q1: If a good has many close substitutes, its price elasticity of demand tends to be elastic.
Answer: TRUE
Many substitutes mean consumers can easily switch when price rises, making demand more responsive to price changes.
Q2: Price elasticity of supply is generally more elastic in the short run than the long run.
Answer: FALSE
PES is MORE elastic in the LONG run because firms have more time to adjust capacity.
Q3: A negative cross-price elasticity of demand (XED) indicates the two goods are complements.
Answer: TRUE
Negative XED means a rise in the price of one good causes a fall in demand for the other — characteristic of complements.
Revision Tip
Elasticity calculations are formula-drilling — build a Revizi flashcard deck with 10+ PED/PES calculations ranging from simple to data-interpretation style.
Related Concepts
Last updated: March 2026 · 3 flashcards · 4 quiz questions