Practise calculating and interpreting PED, YED and XED and applying their signs and magnitudes to classify goods, predict revenue and support pricing, product or tax decisions.
What can be measured by cross-elasticity of demand?
a change in real income as a result of a change in the price of consumer goods
a change in the demand for a good in response to a change in the price of a complement
a change in the price of a good in response to a change in the demand for a substitute
a change in the price of a good when the demand for it changes
B
With the help of a formula, explain what is meant by the income elasticity of demand for a product and consider the extent to which demand for the product will always rise at the same rate as the income of its consumers.
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 an accurate formula of YED (1). For clear and accurate knowledge and explanation of what is meant by YED (1) including the difference between elastic and inelastic YED (1).
AO2 Analysis (max 3 marks)
For a clear understanding and explanation that this depends on the coefficient value of YED (1) and analysis of the different outcomes depending on whether the product is normal (positive coefficient) (1) or inferior (negative coefficient) (1).
AO3 Evaluation (max 2 marks)
For a considered evaluation of the possible outcomes (1) leading to a valid conclusion (1).
AO1 Knowledge and understanding
AO2 Analysis
AO3 Evaluation
Assess the extent to which price elasticity of supply or cross elasticity of demand is more useful to businesses.
Assess the extent to which price elasticity of supply or cross elasticity of demand is most useful to businesses.
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
- An assessment of the usefulness of PES e.g., it estimates how quickly a business will take to respond to changes in demand, levels of stock it can hold etc., but this is only an estimate and may change.
- An assessment of the usefulness of XED e.g., it tells the business whether their product is a substitute (positive XED) or a complement (negative XED) and how close the relationship is and hence its sensitivity to the actions of other businesses, but the speed of change may mean it is quickly out of date.
Level 1 responses will be assertive and lacking in explanations / mainly descriptive and/or or mainly lacking in relevance to the question.
Level 2 responses may contain some inaccuracies and will be one sided. Analysis will be explained at least in part and will be largely relevant to the question.
Level 3 responses will consider alternative policies / concepts etc. and will be balanced. Explanations of points raised will be offered and will be accurate and relevant to the question.
AO3 Evaluation
- For a full evaluation of the usefulness of both measurements compared with each other leading to:
- A valid conclusion
Marking guidance:
Accept all valid responses.
AO1 Knowledge and understanding and AO2 Analysis
AO3 Evaluation
EITHER
Which statement is correct?
Demand for an inferior good has a positive relationship to income and a negative relationship to price.
Demand for an inferior good has a negative relationship to income and a negative relationship to price.
Demand for a normal good has a positive relationship to income and a positive relationship to price.
Demand for a normal good has a negative relationship to income and a positive relationship to price.
B