The Examiner's Vault: Price Elasticity of Demand Explained (CIE 9708)
Updated: Sep 2
If there is one concept that Cambridge examiners absolutely love to test, it is Price Elasticity of Demand. It appears in Paper 1, Paper 2, Paper 3, AND Paper 4. If you cannot explain PED in your sleep, you are guaranteed to lose marks.
The Question:
"Define price elasticity of demand and explain why it is important for businesses." *(4 Marks)*
📝 The Bullet Point Plan:
Define PED: responsiveness of Qd to a change in price.
State the formula: PED = %ΔQd / %ΔP.
Importance 1: Pricing strategies (elastic vs inelastic goods).
Importance 2: Production and revenue decisions.
✍️ The Basic Answer:
[DEFINE] Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price. It is calculated using the formula: PED = %ΔQd / %ΔP.
[EXPLAIN] PED is important for businesses as it informs pricing strategies. If demand for a product is price inelastic (PED < 1), businesses can increase prices without a significant drop in quantity demanded, leading to higher revenue. For example, pharmaceutical companies often raise prices for life-saving drugs, as consumers continue purchasing them despite price increases.
[APPLY] Conversely, if demand is price elastic (PED > 1), lowering prices can attract more customers, potentially increasing revenue. Airlines, for instance, analyze ticket demand elasticity to adjust prices during peak and off-peak seasons.
The full answer, free
The basic answer above earns you 2-3 marks. But the mark scheme requires specific formula notation and examiner-approved phrasing to hit 4/4.
The model answer for this exact question is on the portal, with the formula notation the mark scheme wants, worked examples and the elastic against inelastic revenue cases. There is no payment and no account. Open the free notes and practice.
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