CAIE IGCSE Economics 2.6.5 Significance of PED
Practise using PED to explain pricing, tariffs and tax decisions by firms and governments in real-world contexts.
- Syllabus
- 2027–2029
- Course
- Economics 0455
Exam points
- analyse how a firm uses PED to decide whether a price rise or price cut will increase revenue
- apply PED to tariffs or indirect taxes to judge effects on imports, demand and government revenue
- explain how different demand conditions can support different prices across countries
2.6.5—Significance of PED question 1
[Maximum number: 6]
Some markets in Belgium are in equilibrium. The country produces a wide range of goods and services with different degrees of price elasticity of demand. The Belgian Government wants the economy to move to a production possibility point beyond its current production possibility curve (PPC). Belgium's scientific industry is one industry which is doing well. Workers in this industry are highly specialised.
Analyse how price elasticity of demand can influence a firm's pricing decisions.
Analyse how price elasticity of demand can influence a firm's pricing decisions.
Coherent analysis which might include the following.
Price elasticity of demand is a measure of the responsiveness of demand to a change in price (1).
If demand is elastic, a rise in price will cause a greater percentage change in demand (1) may indicate the firm's product has close substitutes / is not a necessity / takes a significant proportion of consumers' incomes (1) may encourage firms to lower price (1) raise revenue (1).
If demand is inelastic, a rise in price will cause a smaller percentage change in demand (1) may indicate the firm's product has few substitutes / is a necessity / takes a small proportion of consumers' incomes (1) may encourage firms to raise prices (1) revenue would increase (1).
6
Reward, but do not expect:
Facilitate price discrimination (1) charging higher prices in markets with inelastic demand (1) valid example, e.g. higher rail fares at peak times (1).
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