What is the definition of price elasticity of demand?
the responsiveness of quantity demanded of a product to a change in income of consumers
the responsiveness of quantity demanded of a product to a change in the price of a complementary product
the responsiveness of quantity demanded of a product to a change in the price of that product
the responsiveness of quantity demanded of a product to a change in the price of a substitute product
C
A German car producer estimates the price elasticity of demand (PED) for its cars is -2.0 . What can be concluded from this information?
its cars are price elastic
its cars are price inelastic
its cars are unitary elastic
its cars take time to produce
A
A Swiss multinational food manufacturer increased prices for its products by an average of 8% in 2022. It increased its prices in the USA by 11.6%. This multinational company (MNC) is one of the world's oldest MNCs. It started as a small firm but has grown over the last 160 years. Over this period, its decisions have always been influenced by opportunity cost.
Explain two reasons why a firm may charge a different price for the same product in two different countries.
Logical explanation which might include:
- demand may be higher / lower in one country (1) resulting in higher / lower prices (1)
- supply maybe higher / lower in one country (1) resulting in lower prices (1)
- higher income / GNP per head in one country ( 1 ) means more able to afford to pay higher price (1)
- price elasticity of demand may vary (1) more power to raise price where demand is inelastic (1)
- greater competition in one country / more substitutes (1) leads to lower prices to be competitive (1)
- indirect tax rates may vary e.g. higher GST / VAT / import tariffs (1) will lead to higher price (1)
- government subsidies may be given in some countries (1) lowering price (1)
- local material costs / wages may be lower in one country (1) lowering costs of production mean lower prices (1)
- different transport costs ( 1 ) may be cheaper to transport to countries close by (1)
- quality of good may be higher (1) enable firm to charge a higher price (1).
One mark each for two reasons identified and one mark each for two explanations.
If more than two reasons are given, consider the first three.
Note: There will be other relevant reasons. To get the development mark there must be a justification of why that factor will affect prices.
Do not accept answers based on foreign exchange rate.
The price elasticity of demand (PED) of a good is -1.
What will happen to both demand and total revenue as price increases?
demand will fall and total revenue will not change
demand will fall and total revenue will rise
demand will rise and total revenue will not change
demand will rise and total revenue will rise
A
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).
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).