CAIE A-Level Business A2 8.1.1 Elasticity

[Maximum number: 16]

(a)

Tour	Original price	New price	Unit sales before price increase (2020)	Unit sales after price increase (2021)	Price elasticity of demand
Bespoke clothing items	$200	$220	300	285	See 4(a)
Fast-fashion clothing	$5	$6	200 000	150 000	−1.25

Table 1.2 Data for price elasticity of demand (monthly unit sales)

Refer to Table 1.2. Calculate the price elasticity of demand (PED) for bespoke clothing.

[ 4 ]

Refer to Table 1.2. Calculate the price elasticity of demand (PED) for bespoke clothing.
Table 1.2 Data for price elasticity of demand

PED=% change in quantity demanded / \% change in price (1 mark if no relevant calculations)

\% change in quantity demanded = $-15 / 300 \times 100=-5 \%$ (1) (minus sign needed)

\% change in price $20 / 200 \times 100=10 \%(1)$

PED =-5 % / 10 %=-0.5 (4)

0.5 (3)

Incorrect units e.g. $-0.5 (3)

$0.5 (2)

(b)

Sunil’s Clothing Company (SCC)

SCC is a private limited company, owned by Sunil and his family. SCC is based in country Z, an island in Asia. Country Z is a developing economy. It is a popular manufacturing location for ‘ready made clothing’, which is exported to the rest of the world. SCC has grown quickly since it started in 2010 and now has two large factories. The clothing production work is labour intensive, carried out by mainly female workers using cloth cutting and sewing machines. SCC’s clothes are bought in large quantities by budget ‘fast-fashion’ brands in developed countries, which then add their own labels and packaging. SCC’s mission statement is ‘reliable quality clothing at the lowest possible prices’.

Sunil also has a small team who produce individual ‘bespoke’ clothing items, made to specified designs required by customers. These are ordered by consumers in country Z and include outfits for weddings and other occasions. For these items, the emphasis is on uniqueness and quality and SCC is able to charge high prices, as customers can specify exactly what they want and know that their clothes will be ‘one-off’ designs. Sunil would like SCC to expand production of the more exclusive designs, as he knows that in the mass-produced fast-fashion market it faces increased competition, both from other local firms and from companies based in other Asian countries. Overall capacity utilisation for SCC’s two factories is 85% on average, and Sunil is forecasting a 10% increase in sales next year.

External influences

SCC is impacted by changing external factors in country Z and also in the countries where its biggest customers are located. In country Z, inflation and unemployment are both rising and the currency has depreciated by 10% on average against major currencies. In the developed countries where SCC’s fast-fashion business customers are based, inflation is also rising and consumers’ real incomes are decreasing. There is also increasing consumer concern about unethical business practices used by some fast-fashion suppliers based in developing countries.

Price elasticity of demand and income elasticity of demand

Real incomes in SCC’s main export countries have fallen by 6% on average, and Sunil has estimated that demand for his fast-fashion clothing has increased by 8%. Sunil has also collected some sales figures, based on average prices, for fast-fashion and bespoke clothing items, as shown in Table 1.2.

Tour	Original price	New price	Unit sales before price increase (2020)	Unit sales after price increase (2021)	Price elasticity of demand
Bespoke clothing items	$200	$220	300	285	See 4(a)
Fast-fashion clothing	$5	$6	200 000	150 000	−1.25

Table 1.2 Data for price elasticity of demand (monthly unit sales)

Evaluate the usefulness of PED and income elasticity of demand (YED) to SCC's sales forecasting for mass-produced clothing.

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Level	AO1 Knowledge and understanding 2 marks	AO2 Application 2 marks	AO3 Analysis 2 marks	AO4 Evaluation 6 marks
3				5–6 marks Developed evaluation in context • A developed judgement/conclusion is made in the business context. • Developed evaluative comments which balance some key arguments in the business context.
2	2 marks Developed knowledge of relevant key term(s) and/or factor(s) is used to answer the question.	2 marks Developed application of relevant point(s) to the business context.	2 marks Developed analysis that identifies connections between causes, impacts and/or consequences.	3–4 marks Developed evaluation • A developed judgement/conclusion is made. • Developed evaluative comments which balance some key arguments.
1	1 mark Limited knowledge of relevant key term(s) and/or factor(s) is used to answer the question.	1 mark Limited application of relevant point(s) to the business context.	1 mark Limited analysis that identifies connections between causes, impacts and/or consequences.	1–2 marks Limited evaluation • A judgement/conclusion is made with limited supporting comment/evidence. • An attempt is made to balance the arguments.
0	0 marks No creditable response.	0 marks No creditable response.	0 marks No creditable response.	0 marks No creditable response.

produced clothing.
Evaluate the usefulness of PED and income elasticity of demand (YED) to SCC's sales forecasting for mass-produced clothing.
Evaluate the usefulness of PED and income elasticity of demand (YED) to SCC's sales forecasting for mass-produced clothing.

Figure for Answer to Question (b) — CAIE A-Level Business A2

4(b)

OFR for 4(a)

Indicative content

Responses may include:

AO1 Knowledge and understanding

- Knowledge and meaning of PED and YED - responsiveness of demand to a change in income or price.

- Generic knowledge of PED and values, including price elastic/inelastic.

- Generic knowledge of positive and negative income elasticity and meaning of income elastic/income inelastic demand.

- Generic knowledge of reasons for sales forecasting and sales forecasting methods, such as extrapolation, correlation, time series analysis. (maximum 1 K mark)

AO2 Application

Limited application, ${ }^{\mathrm{APP}}$ applies knowledge to SCC once.

Developed application, ${ }^{\mathrm{APP}}+{ }^{\mathrm{APP}}$ applies knowledge to SCC twice

- The customers of SCC's mass-produced clothing are B2B budget brand companies, whereas the bespoke items are sold to consumers so B2C.

- Pricing should take into account the target market, but also in this case fast fashion is being sold 'in bulk', whereas bespoke items are 'one off'.

- Elasticity calculation suggest that mass-produced clothing has price elastic demand, but is also an inferior product, with demand increasing as real incomes fall.

- Mass-produced (fast fashion) clothing sales will be highly sensitive to changes in fashion and consumer tastes.

- Fast fashion clothing has a YED of -1.33 (inferior product).

- Calculations of revenue from table 1.2 before and after price increases:

Bespoke clothing $60000 increased to $62 700. Fast fashion $1000000 decreased to $900000

AO3 Analysis

Limited analysis ${ }^{\text {AN }}$ - candidate shows one link in the chain of analysis.

Developed analysis ${ }^{\text {L2 AN }}$ - candidate shows two or more links in the chain of analysis.

4(b)

- Development of application points, in terms of the likely usefulness of price and income elasticities in sales forecasting.

- Price elastic demand for mass-produced clothing suggests that B2B customers are price sensitive, and that decreasing prices is likely to result in higher revenues. AN This could mean that the currency depreciation will stimulate sales as it leads to cheaper export prices. L2 AN

- Negative income elasticity (-1.33) for mass-produced clothing suggests that falling real incomes may lead to higher demand ${ }^{\mathrm{AN}}$ as business customers opt away from higher priced suppliers, as they know that their customers will be looking for cheaper prices, this could also stimulate demand from the budget brand companies. L2AN

- Sunil has past sales data, so forecasting based on this may be a good starting point, such as time series analysis or simple extrapolation, will enable him to predict sales.

- However, markets are dynamic and the mass-produced clothing market is becoming more competitive. This may mean the likelihood of a price war. AN This would probably mean that elasticity data is not up to date and predicted demand may be lower, resulting in lower revenues. L2 AN

- Consumers are becoming more concerned about unethical business practises used by suppliers in developing countries. This could have a negative impact on SCC, especially if there is bad publicity or pressure group activity, leading to lower sales.

AO4 Evaluation

Limited evaluation ${ }^{\text {гval }}$ - limited supported judgement and/or a weak attempt at evaluative comment.

Developed evaluation ${ }^{\text {L2 }}$ - supported judgement and/or reasonable evaluative comment.

Developed evaluation in context ${ }^{\left\lfloor 3 \text { rvat }^{\text {® }}\right.}$ — supported judgement in context and/or reasonable evaluative comment in context.

- It will be useful for SCC to keep a close watch on response from customers to both price and income changes, as these will have big influences on their ability to buy.

- However, other parts of the marketing mix and strategy will also be important, especially keeping up with fashion trends.

- Currency fluctuations, such as the depreciation may be short or long term and will vary across different currencies.

- YED is especially unreliable, as mass-produced clothing will be a 'normal' good for low-income earners, but an inferior good for high-income earners.

- Many other external factors could influence the demand for SCCs clothing, other than price and income changes.

- Elasticity data goes out of date very quickly, given other changing influences.

Accept all valid responses.

CAIE A-Level Business A2 8.1.1 Elasticity Topic Practice

Question 1

Question (a)

Question (b)