With the help of a formula, explain what is meant by the term price elasticity of demand for
a product and consider the extent to which it allows an entrepreneur to determine the
effect of price changes on the total expenditure on their product. [8]
Follow the point-based marking guidance at the top of this mark scheme and award:
up to 3 marks for AO1 Knowledge and understanding
up to 3 marks for AO2 Analysis
up to 2 marks for AO3 Evaluation.
AO1 Knowledge and Understanding (max 3 marks)
For a clear understanding of the meaning of price elasticity of demand (1) plus an accurate
formula (1) plus a clear understanding of what is meant by price elastic and price inelastic
that refers to relative proportionate or percentage changes rather than large or small
changes (1)
AO2 Analysis (max 3 marks)
Up to 2 marks for clear analysis of how total expenditure on a product is affected by price
changes if the demand is price elastic.
Up to 2 marks for clear analysis of how total expenditure on a product is affected by price
changes if the demand is price inelastic.
Note: as the question refers to price changes it is expected that answers should consider
both price increases and price decreases. If either part of the analysis only considers a price
rise or a fall, then a maximum of 1 mark for that part of the analysis. If both parts of the
analysis consider a price rise or fall then a maximum mark of 2 i.e., 1 + 1.
AO3 Evaluation (max 2 marks)
Up to 2 marks for considering the extent to which the concept can help the entrepreneur
and making a judgement.
Consideration of the accuracy of the measure and the ease of calculation
for an entrepreneur
Consideration of other factors which may affect total expenditure on a
product when price changes.
Reserve 1 mark for a conclusion that focuses on the extent to which it
allows the entrepreneur to determine the effect of price changes.
Assess whether the concept of price elasticity of supply or cross elasticity of
demand will be the more useful to a business wanting to increase its total sales in a
growing economy.
Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B:
AO3 Evaluation to mark candidate responses to this question.
AO1 and AO2 out of 8 marks.
AO3 out of 4 marks.
Indicative content Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
Analysis of the concept of price elasticity of supply may explain its use in
increasing a business’ total sales by examining the following.
Usefulness depends on the type of goods and whether decisions need to
be made in the short run or long run.
It may help businesses with regards to stock holding and decisions about
which products to focus on
It may help businesses make decisions about productive capacity and
whether e.g., to invest in new technology BUT
It depends on the accuracy of the data used to produce the value.
This may change over time and the value may have little value in a
growing economy.
Some products, such as agricultural/perishable products, will naturally
have a more price inelastic supply and knowledge of the value may have
little use.
Analysis of the concept of cross elasticity of demand may explain its use in
increasing a business’s total revenue by examining the following.
It will mean the business understands the relationship between its
product and others i.e., whether they are complements or substitutes.
It also measures the closeness of the relationship and informs decisions
about how quickly and the extent to which it should react for example if a
competitor changes its prices.
It should assist a business to develop a pricing strategy that maximises
opportunities to generate more sales BUT
The usefulness depends on the accuracy of the data and in a growing
economy, it may not be possible to keep the value up to date. It is
therefore often dependent on estimates that may be inaccurate.
Businesses may not be able to act on the data by changing prices if their
cost structure cannot be easily changed.
Other variables other than cross elasticity of demand may be more
important for example non price determinants such as brand loyalty.
Better answers will refer directly/implicitly to their usefulness to a business
operating in a growing economy. Answers which do not are unlikely to gain
more than L3 lower band.
One sided response i.e., those that only consider one concept or do not
analyse the problems of at least one concept will not gain beyond L2
AO3 Evaluation
Consideration of the likely effectiveness of both measures in increasing
total sales in a growing economy that assesses which is most likely to be
effective. If there is no direct/implicit reference to a growing economy,
then L1 upper maximum.
Candidates may consider an alternative concept e.g., YED to assess
whether sales would actually grow in these circumstances,
A justified conclusion which is most likely to be effective. Accept all valid
responses.
A one-sided response cannot gain any marks for evaluation. AO1 Knowledge
and understanding and AO2 Analysis
AO3 Evaluation
With the help of diagrams, use the concept of income elasticity of demand to explain the
impact of a fall in incomes on the equilibrium price and equilibrium quantity of a normal
good and an inferior good
For a normal good, at a time when incomes are falling, demand will be expected to fall
resulting in a shift to the left of the demand curve. For an inferior good, at a time when
incomes are falling, demand will be expected to rise resulting in a shift to the right of the
demand curve. This will result in a fall and rise respectively in the equilibrium price and
quantity demanded which should be clearly shown on two separate diagrams as required by
the question Do not reward application where one diagram is used to illustrate the effects
on both types of goods. The maximum mark that this type of response could score is
[2+3+1]
For knowledge and understanding of the meaning of income elasticity of demand (1 mark)
together with an accurate formula (1 mark)
Note: the correct KU of the meaning of income elasticity may be rewarded with 1 mark if it
is clear within the application even if it was initially incorrect within an opening statement /
definition.
For application that explains the meaning of a normal good (1 mark) and uses a diagram to
illustrate that the demand curve will shift to the left (1 mark) leading to a fall in equilibrium
price and quantity demanded which is clearly shown on the diagram (1 mark).
For application that explains the meaning of an inferior good (1 mark) and uses a separate
diagram to illustrate that the demand curve will shift to the right (1 mark) leading to a rise in
equilibrium price and quantity demanded which is clearly shown on the diagram (1 mark).
Guidelines
For a normal good, at a time when incomes are falling, demand will be expected to fall
resulting in a shift to the left of the demand curve. For an inferior good, at a time when
incomes are falling, demand will be expected to rise resulting in a shift to the right of the
demand curve. This will result in a fall and rise respectively in the equilibrium price and
quantity demanded which should be clearly shown on two separate diagrams as required by
the question Do not reward application where one diagram is used to illustrate the effects
on both types of goods. The maximum mark that this type of response could score is
[2+3+1]
For knowledge and understanding of the meaning of income elasticity of demand (1 mark)
together with an accurate formula (1 mark)
Note: the correct KU of the meaning of income elasticity may be rewarded with 1 mark if it
is clear within the application even if it was initially incorrect within an opening statement /
definition.
For application that explains the meaning of a normal good (1 mark) and uses a diagram to
illustrate that the demand curve will shift to the left (1 mark) leading to a fall in equilibrium
price and quantity demanded which is clearly shown on the diagram (1 mark).
For application that explains the meaning of an inferior good (1 mark) and uses a separate
diagram to illustrate that the demand curve will shift to the right (1 mark) leading to a rise in
equilibrium price and quantity demanded which is clearly shown on the diagram (1 mark).
Diagrams showing the relationship between income and q demanded for normal and
inferior goods must not be rewarded (unless solely used as part of the explanation of the
meaning of what normal and inferior goods are) as they clearly do not show the changes in
equilibrium price and quantity. The only diagrams that may be accepted here are normal
supply and demand diagrams that clearly show the appropriate shifts in demand and the
resulting changes in equilibrium price and quantity demanded.
Discuss the difficulties that businesses might have when they try to control the factors that
determine the price elasticity of demand for a product and consider whether attempts to
control these factors are likely to be successful. 12
Factors include whether the good is a necessity, whether it is habit forming, the availability,
attractiveness of substitutes, the proportion of income taken in the purchase of the good,
and the time period.
For analysis that considers the difficulties a business might have in attempting to control a
factor that influences the price elasticity of demand. (Up to 4 marks per factor analysed)
(8 marks maximum)
Responses that simply explain the factors that determine PeD without any references to the
difficulties that business might have in controlling these factors should not be rewarded.
For evaluation that considers whether the difficulties in controlling the factors can be
overcome (3 marks) and arriving at a reasoned conclusion (1 mark)
Factors include whether the good is a necessity, whether it is habit forming, the availability,
attractiveness of substitutes, the proportion of income taken in the purchase of the good,
and the time period.
For analysis that considers the difficulties a business might have in attempting to control a
factor that influences the price elasticity of demand. (Up to 4 marks per factor analysed)
(8 marks maximum)
Responses that simply explain the factors that determine PeD without any references to the
difficulties that business might have in controlling these factors should not be rewarded.
For evaluation that considers whether the difficulties in controlling the factors can be
overcome (3 marks) and arriving at a reasoned conclusion (1 mark)
Candidates must consider at least two factors to score full marks for analysis or they can
consider more than two factors and their difficulties in less depth.
There are no KU marks awarded in part b for merely explaining / defining terms or phrases
within the question.
Explain how the concept of cross-elasticity of demand can be used to distinguish between
goods that are substitutes, those that are complements and those that have no relationship.
For knowledge and understanding, the candidate must display an awareness of the idea of
‘responsiveness’ as well as an accurate formula
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For analysis that explains the likely effectiveness of a minimum price on a demerit good.
Maximum of 3 marks if only benefits or drawbacks are considered (up to 4 marks)
Other policies include indirect taxes, education campaigns, subsidisation of alternatives.
For analysis that explains the likely effectiveness of one other policy. Maximum of 3 marks if
only benefits or drawbacks are considered
And for evaluation that clearly compares the effectiveness of both policies (3 marks) that
leads to a reasoned conclusion as to which policy is more likely to be successful (1 mark)
For knowledge and understanding of the concept of cross elasticity of demand. What it
measures (1 mark) and the formula (1 mark)
And application explaining that a positive value indicates a substitute (1 mark) and explains
why (1 mark)
And explains that a negative value indicates a complement (1 mark) and why (1 mark)
And explains that a value of zero indicates unrelated goods (1 mark) and why (1 mark)
For knowledge and understanding, the candidate must display an awareness of the idea of
‘responsiveness’ as well as an accurate formula
An economy is experiencing a fall in average incomes during a severe recession. Income
elasticity of demand would be useful to an entrepreneur because it would indicate those
goods that are likely to experience a decrease in demand and those that should
experience a rise in demand i.e. normal goods and inferior goods respectively
Discuss the extent to which the concepts of income elasticity of demand and price
elasticity of demand might be useful to an entrepreneur in this economy and consider
which would be more useful.
For analysis that explains the usefulness of income elasticity of demand to an entrepreneur
when incomes are falling. (Up to 4 marks)
Price elasticity of demand will inform an entrepreneur of the possibility of changing prices to
increase revenue.
For analysis that explains the usefulness of price elasticity of demand to an entrepreneur
when incomes are falling (Up to 4 marks) The estimates might be used by an entrepreneur
or firms for sales forecasting, investment decisions, production planning, location and new
markets. And for evaluation that clearly compares the usefulness of each concept (3 marks)
that leads to a reasoned conclusion as to which is the most useful (1 mark)
Income elasticity of demand would be useful to an entrepreneur because it would indicate
those goods that are likely to experience a decrease in demand and those that should
experience a rise in demand i.e. normal goods and inferior goods respectively
Discuss the extent to which the concepts of income elasticity of demand and price elasticity
of demand might be useful to an entrepreneur in this economy and consider which would be
more useful.
For analysis that explains the usefulness of income elasticity of demand to an entrepreneur
when incomes are falling. (Up to 4 marks)
Price elasticity of demand will inform an entrepreneur of the possibility of changing prices to
increase revenue.
For analysis that explains the usefulness of price elasticity of demand to an entrepreneur
when incomes are falling (Up to 4 marks)
The estimates might be used by an entrepreneur or firms for sales forecasting, investment
decisions, production planning, location and new markets.
And for evaluation that clearly compares the usefulness of each concept (3 marks) that leads
to a reasoned conclusion as to which is the most useful (1 mark). There are no KU marks
awarded in part (b) for merely explaining/ defining terms or phrases within the question
