CAIE A-Level Economics 7.8.5 PED & firm revenue

CAIE A-Level Economics 7.8.5 PED & firm revenue
Cambridge International AS & A Level Economics 9708 syllabus for exams in 2026, 2027 and 20282026–2028

Practise linking PED to total and marginal revenue on normal and kinked demand curves, including loyalty and oligopoly examples.

How this is tested

  • use PED to predict whether a price or output change raises total revenue
  • interpret MR=0 or unit elasticity as the point where total revenue is maximised
  • explain kinked demand using rival reactions and the vertical section of MR

Question 1(b)

[Maximum number: 4]

Loyalty and consumer behaviour

Consumer loyalty can be shown in different ways. It may be through:
- customer reward schemes (e.g. loyalty cards) that offer discounts based on the amount spent with a specific retailer
- emotional loyalty where customers prefer a particular brand that they always buy
- monopoly loyalty where there is no alternative to the retailer or brand.

Supermarkets try to attract customers by using loyalty cards that give promotions and price reductions to those who have a card. The cards also help the supermarket build barriers between retailers to gain a marketing advantage.

When consumers are collecting points towards a particular goal, the loyalty card may hinder free competition and prevent switching between brands. However, sometimes the discounts used by the scheme may be confusing and make it difficult for the consumer to compare prices.

There are risks for the retailers too. The loyalty cards require substantial investment to run - one supermarket put the cost at US $60 m\$ 60 \mathrm{~m} a year. These costs could well result in higher prices for the consumer.

But how do loyalty card schemes fit into the context of the way in which consumers make choices? A research report found that in one country where 70%70 \% of consumers had a loyalty card, only about 10\% were loyal to one particular card.

It has been found that when choosing to buy groceries consumers look for one-stop shopping (43%)(43 \%), good service ( 22%22 \% ), price ( 18%18 \% ), the availability of a coffee shop ( 12%12 \% ) and help with packing (6\%). Loyalty cards come below these.

Companies use loyalty cards to gather data on customers and their buying preferences. They then direct future offers to consumer wishes in specific promotions both online and in the mail. Loyalty schemes are thus sometimes less about loyalty and more about understanding customers' wants.

The economic model of consumer behaviour using indifference curves assumes that consumers conduct research and buy products and services in a rational way. Many purchases, however, are based on habit and consumer research is imprecise. When the consumer has a low involvement in research or a low emotional attachment to the product, there will be little loyalty.

Source: RSA Journal

Explain why a profit-maximising retailer may be interested in the link between consumers' loyalty and price elasticity of demand.