Question 21M.1.SL.TZ2.1b
| Date | May 2021 | Marks available | [Maximum mark: 15] | Reference code | 21M.1.SL.TZ2.1b |
| Level | SL | Paper | 1 | Time zone | TZ2 |
| Command term | Discuss | Question number | b | Adapted from | N/A |
Discuss the importance of price elasticity of demand and cross price elasticity of demand for a firm’s decision making.
[15]
PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definitions of PED and XED
- diagram(s) to illustrate PED and XED
- explanation of the importance of PED estimates in terms of the impact on total revenue of price changes and the importance of XED estimates in terms of changes in the price of substitutes and complements
- examples in practice of the importance of PED for business revenue when price changes and the importance of XED when there are changes in the price of substitutes or complements
- synthesis or evaluation (discuss).
Discussion may include: the difficulty of obtaining reliable estimates in reality due to imperfect information, past data not necessarily being a guide to the future, the unreliability of consumer survey techniques, the problem of estimating variables that are not constant and the impact of factors other than the price of the good and the price of other goods.
Award a maximum of [9] if only PED or only XED is addressed.
Many students produced good responses on how price and cross price elasticity of demand are important to firms in terms of changing price to increase revenues and responding to the price changes of related goods. Many candidates used effective diagrams and real-world examples to illustrate their answers. A weakness in answers was many candidates did not evaluate the points they made. A strong answer in this section would include discussion of the problems of measuring price and cross price elasticity of demand because the values change over time and any measurement of elasticity assumes that other factors affecting the demand for a good remain constant.
