HookThe Sugar Tax did not work the way you think
The 2018 Soft Drinks Industry Levy added 18p per litre to drinks with 5–8g of sugar per 100ml, and 24p to anything above 8g. In its first two years, total sugar in soft drinks fell roughly 30% — but consumption of soft drinks only fell about 10%. The gap is the answer to a question students rarely think to ask: who responded to the price signal?
Most of the heavy lifting came from producers, not consumers. Coca-Cola reformulated Fanta and Sprite to land just under the 5g threshold. Britvic reformulated Robinsons. The price signal hit firms with high reformulation budgets, and they moved first. Consumer price elasticity of demand for sugary drinks is real but moderate — around 0.6 to 0.8. The producers' willingness to re-engineer the product to dodge the levy turned out to be enormous. Every question in 2.2 is some version of this: how sensitive is behaviour to a price or income change, and whose behaviour is it?
ModelPED — the sensitivity dial on demand
Price elasticity of demand = %ΔQd ÷ %ΔP. Below 1 in absolute value = inelastic: necessities, addictions, things with no close substitute. Above 1 = elastic: luxuries, easily-postponed purchases, anything with a rival one shelf over. At exactly 1, total revenue is unchanged when price moves.
The determinants Edexcel rewards you for quoting: availability of substitutes (the big one), degree of necessity or addiction, proportion of income spent on the good, and time — demand is almost always more elastic in the long run, because consumers find alternatives. Tobacco PED is about 0.4 in the short run but closer to 0.8 in the long run: addictive in the moment, substitutable over years.
The revenue rule is where the marks live. If demand is inelastic, a price RISE raises total revenue — that is why rail operators raise regulated fares every January and why Apple prices the iPhone where it does. If demand is elastic, a price rise destroys revenue: the customers walk.
A cinema charges £10 and sells 2,000 tickets a week. It raises the price to £11 (a 10% rise) and sales fall to 1,700 (a 15% fall). PED = −15% ÷ +10% = −1.5, elastic. Revenue check: before, £10 × 2,000 = £20,000; after, £11 × 1,700 = £18,700. Revenue FELL £1,300 — exactly what the elasticity predicted. If the same 10% rise had cut sales only 4% (PED 0.4), revenue would have risen to £11 × 1,920 = £21,120. One calculation, both directions — that is a full 4-mark answer.
ModelYED — what happens when Britain gets richer (or poorer)
Income elasticity of demand = %ΔQd ÷ %Δincome. Positive YED = normal good; within normal, 0-to-1 is a necessity (bread, toothpaste) and above 1 is a luxury (gym memberships, city breaks). Negative YED = inferior good — demand rises when incomes FALL. Aldi and Lidl's market share jumped in the 2008–09 recession and again in the 2022–23 cost-of-living squeeze; own-brand baked beans and value ranges are the textbook UK examples.
Why firms care: YED tells you what a recession does to your revenue before it happens. A cruise operator (YED ≈ +2) should expect demand to collapse when real incomes fall 3%; a discount supermarket (YED negative) should expect footfall to rise. This is why conglomerates diversify across YED profiles — the portfolio smooths the economic cycle.
UK real incomes fall 2% in a downturn. A restaurant chain has YED = +1.8, a frozen-food discounter has YED = −0.6. Restaurant demand: −2% × 1.8 = −3.6%. Discounter demand: −2% × −0.6 = +1.2%. Same recession, opposite revenue outcomes — and a one-line calculation each.
MechanismCompeting on price — when it works and when it is suicide
Price cuts win customers only when rivals do not follow and demand is elastic. In the UK supermarket price war of 2014–16, the Big Four cut prices repeatedly to slow Aldi and Lidl — but because every rival matched within days, market shares barely moved while industry revenue shrank. Price competition with inelastic industry demand and fast-matching rivals is mutually assured destruction; that is why petrol stations on the same roundabout show identical prices.
Cutting price also signals quality to some consumers — the reason premium brands almost never discount openly and instead run 'gift with purchase' promotions that protect the reference price. Edexcel loves the distinction: a price cut changes quantity demanded ALONG the curve; everything else a firm does tries to SHIFT the curve.
MechanismNon-price competition — shifting the curve instead of sliding down it
The 2.2.3 list: branding, advertising, quality, design, customer service, loyalty schemes, delivery speed. Each one aims to do two things at once — shift demand right (more sold at every price) AND make demand less price-elastic (customers stop comparing). Costa does not want to beat independent cafés on price; it wants the app's free-drink loyalty loop to make price comparison feel irrelevant.
The evaluation move examiners reward: non-price competition is expensive and slow (Sky spent years and billions on exclusive Premier League rights), but the advantage it builds is durable, whereas a price cut is matched by Friday. Short-run cost, long-run moat.
CasePutting it together — one firm, all four ideas
Take Greggs. Its core products are cheap, habitual and quick — demand is price-inelastic day to day, which is why a 5p rise on a sausage roll barely dents volumes but flows straight into revenue. Its YED profile is mildly counter-cyclical: when incomes tighten, £4 meal deals gain customers from £8 coffee-shop lunches, which is why Greggs' sales GREW through the 2022–23 squeeze while mid-market food-to-go shrank.
And its expansion strategy is textbook non-price competition: app-based loyalty, drive-throughs, evening opening, vegan line extensions — all of it built to shift demand right and keep price comparison out of the customer's head. When a 2.2 data question hands you a firm, run this exact scan: price sensitivity of the core product, income profile of the customer base, and which non-price levers the firm is actually pulling. Three sentences of that scan is the difference between a level-2 and a level-4 application mark.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Always quote a number. 'PED is inelastic' earns partial credit; 'PED ≈ 0.4 (inelastic, short run)' earns full marks because it shows you understand the spectrum, not the binary. In calculations, state the formula, substitute, then interpret the result in one sentence — the interpretation mark is the one students drop.
On 8- and 12-markers, the strong evaluation is almost always an elasticity-of-the-other-side point: the Sugar Tax question is secretly about producers reformulating (supply-side response), not just consumers cutting back. And in every revenue question, run the total revenue rule explicitly — examiners report that candidates who write 'revenue = P × Q before and after' outscore those who reason verbally.