Question 20N.1.HL.TZ0.1a
| Date | November 2020 | Marks available | [Maximum mark: 10] | Reference code | 20N.1.HL.TZ0.1a |
| Level | HL | Paper | 1 | Time zone | TZ0 |
| Command term | Explain | Question number | a | Adapted from | N/A |
Explain how knowledge of price elasticity of demand could be used by a firm that is considering changing the price of its product.
[10]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definition of price elasticity of demand
- diagram to show the revenue consequences of elasticity when the price is changed
- explanation of how total revenue changes following a change in price depending on whether the demand for the product is price elastic, price inelastic or unit elastic
- examples of “real-world” products with different elasticities to support the explanation (students do not need to provide actual total revenue figures, but should provide a consideration of why demand for the product might be more or less likely to be elastic or inelastic).
For many candidates, the difficulty in this question was to focus the answer on a single firm that sells a specific product. Many candidates drew diagrams with supply curves as if there are many firms that constitute the supply in a competitive market but then gave an example with a single firm that should be a price taker in a competitive market (and therefore should not be able to change the price of its product/should not have a downward sloping demand curve). Another common mistake, stemming from the failure to distinguish between the supply of a single firm and the supply of the market, was to use examples from broad categories of goods whose demand can be considered price inelastic (such as agricultural products or cigarettes), ignoring the fact that the demand for a single producer (of agricultural products) should be rather price elastic due to the competitive nature of such markets and the substitutability of such goods.
