PED and PES

J2011/Q.3
Firms are keen to know what influences consumers in their buying decisions. Publishing firms in
India have researched why people buy particular magazines and have found that the price elasticity
of demand for different magazines varies.
(b) Explain what is meant by price elasticity of demand. [6]
MS: Explanation of PED:
• percentage change in the quantity demanded of a good or service divided by the percentage
change in the price of the good or service
• different values from perfectly elastic, through elastic, unitary elastic, inelastic to perfectly inelastic
• explanation of mathematical figures for these from 0 to infinity.

(c) Discuss how knowledge of the price elasticity of demand for magazines may be used by a firm
which produces and sells magazines. [8]
MS: Potential usefulness: • link with revenue • if PED is elastic, it would be better to reduce price to
raise revenue • if PED is inelastic, it would be better to increase price to raise revenue.
Application:
• the demand for many magazines will be elastic
• the demand for some magazines, however, will be inelastic
• these will be the more specialised magazines, appealing to more of a niche market
• some consumers might take out a regular subscription to a magazine, and here the demand is
likely to be more inelastic compared with buying magazines in a shop.
Answers which discuss the potential usefulness of PED to firms in general, making no reference at all
to magazines, can gain no more than 5 marks.

J2010/Q.2
(b) Explain what is meant by price elasticity of demand. [4]
MS: General idea that PED measures the sensitivity of demand to a change in price (1).
Precise formula: percentage change in quantity demanded of a product divided by percentage
change in price of a product (2).
Extra comment, e.g. it is usually negative, it can range from perfectly inelastic to perfectly elastic (1).

(c) Why is the concept of price elasticity of demand potentially very useful to a business? [4]
MS: If PED is elastic, the business should reduce price (1) to benefit from an increase in revenue (1).
If PED is inelastic, the business should increase price (1) to benefit from an increase in revenue (1).
N2009/Q.4
Cadbury, the chocolate manufacturer, declared to its shareholders profits of £69 million in the first
six months of 2007. However, in July 2007, floods in the UK severely damaged farms. As a result,
Cadbury had to pay £20 million extra for milk to make the chocolate in addition to its annual milk
cost of £150 million.
(b) Discuss whether the demand for chocolate is likely to be price elastic or price inelastic. [7]
MS: Candidates should mention determinants of elasticity and consider chocolate in the light of
these – necessity, proportion of expenditure, substitutes – and come to a conclusion. They could
also mention the different types of chocolate with different prices which might not all have the same
elasticity. [7]
A maximum of 5 marks only if no conclusion.

J2009/Q.2
A company produces cigarettes which it believes have a low price elasticity of demand.
(a) Explain what is meant by price elasticity of demand. [4]
MS: Explanation in terms of formula, or description (2). Comment on range of elasticity and the
meaning of high and low elasticity (2).

(b) How might knowledge of price elasticity be of use to a producer? [6]

MS: Comment on the ability to predict what would happen to demand and therefore to income and
to profits. Might use knowledge of elasticity of different products to decide which to expand. Might
use knowledge of elasticity to help form pricing policy. Link between elasticity/price changes/total
revenue. Supply elasticity not required but could allow this.

N2008/Q.3
In February 2005 Kuwait opened a new port extension, said to be the largest and most advanced in
the Middle East, near the country’s main oil refinery. It took 3 years to build, can accommodate four
supertankers at the same time, cost £187 million and is hoped to last at least 30 years.
Kuwait is actively seeking new markets for its planned increase in oil production.
(d) Explain what is meant by price elasticity of demand and use this concept to discuss what might
happen in the market for oil if the price of oil was raised. [6]
MS: Definition (2). Oil is likely to be price-inelastic so revenue/expenditure is likely to rise. However,
in the long term, alternatives to oil may be used as new technology is developed (4).

N2005/Q.3
(c) Explain the concept of price elasticity of demand. Choose two goods and explain why they might
have different price elasticities of demand. [6]
MS: Explanation in terms of proportionate responsiveness of demand or in terms of equation
(simple statement 1, range of values 1) with two examples which illustrate how the value of
elasticity might vary (2 for each explanation).

(d) Use the concept of elasticity to discuss how indirect taxes may be used by a government to
(i) increase its revenue,
(ii) decrease imports. [4]
MS: Revenue will be increased more if the government uses an indirect tax on a good with low price
elasticity of demand. Imports will be decreased more if a government places the tax on a good with
high elasticity of demand.

J2005/Q.2
(c) Explain what is meant by price elasticity of demand. [3]
MS: Explanation either in terms of proportionate responsiveness of demand or in terms of equation.
(simple statement 1, range of values 1, examples 1).

(d) In 2003, some tobacco growers in the US wanted to raise prices but a spokesman said the
tobacco industry was no longer in a position where it could increase prices in order to increase
revenue.
Use the concept of price elasticity of demand to discuss what the spokesman meant. [7]
MS: Comment on changes in price affecting the amount demanded. Up to 4 marks for a comment on
how a change in price could affect revenue. For a full range of marks it must be recognised that the
statement implies that elasticity has increased/demand has become more responsive. Sales
decrease with the implication that revenue is affected to a greater extent than in the past. There
should be some comparative statement with the response previously expected as the spokesman
said the growers were ‘no longer in a position…’. This might be due to a change in attitudes towards
smoking.

J2004/Q.3
The UK/Dutch consumer goods company Unilever had a 35% rise in profits in the first part of
2002. The group, whose brands include tea, soap and washing powder, benefited from a rise in
profit margins, but the growth in sales was slow.

(c) Explain what is meant by a high price elasticity of demand. [4]

 MS: Up to 2 marks for a definition or formula for price elasticity of demand.
Up to 2 marks for explaining “high elasticity” as the situation where the %
change is quantity demanded is greater than the % change in price or words
to that effect.