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: What is price elasticity of demand (PED) and what factors affect it?
PED measures the responsiveness of quantity demanded to a change in price: PED = % change in quantity demanded ÷ % change in price (expressed as an absolute value). Demand is elastic if PED > 1 and inelastic if PED < 1. The Study Design lists four factors: degree of necessity (necessities are inelastic), availability of substitutes (more substitutes = more elastic), proportion of income spent (larger share = more elastic) and time (demand becomes more elastic over a longer period).
Q2: What is price elasticity of supply (PES) and what factors affect it?
PES measures the responsiveness of quantity supplied to a change in price: PES = % change in quantity supplied ÷ % change in price. Supply is elastic if PES > 1 and inelastic if PES < 1. The Study Design lists: spare capacity (firms with unused capacity can expand output quickly, so supply is more elastic); production period (goods that take a long time to produce have more inelastic supply); and durability of goods (goods that can be stored can be released when price rises, making supply more elastic).
Sample Quiz Questions
Q1: Demand for a good with many close substitutes tends to be price elastic.
Answer: TRUE
Consumers can easily switch to substitutes when the price rises, so quantity demanded is more responsive to price.
Q2: Supply is usually more price elastic when firms have little or no spare capacity.
Answer: FALSE
Spare capacity lets firms increase output quickly, making supply MORE elastic. With no spare capacity, supply is relatively inelastic.
Q3: Goods that make up a large proportion of consumers' income tend to have more elastic demand.
Answer: TRUE
When a good takes a large share of income, a price change has a big effect on consumers' budgets, so they respond more strongly.
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: 9 October 2026 · 2 sample flashcards · 3 sample quiz questions