Demand
50 marks: 12 multiple choice questions, a data response and an essay. Answers are at the end.
AQA: Question 14 would be a 25-mark question on your papers.
Edexcel: Question 14 would be a 25-mark question on your papers.
OCR: Question 14 would be a 25-mark question on your papers.
Multiple choice online
The test
1A fall in the price of a good, with everything else unchanged, causes:
- A a contraction of demand, shown as a movement along the existing demand curve
- B an extension of demand, shown as a movement along the existing demand curve
- C a rightward shift of the whole demand curve
- D a leftward shift of the whole demand curve
2Which of the following would shift the demand curve for electric cars to the right?
- A a fall in consumer incomes
- B a fall in the price of electric cars
- C a rise in the price of petrol
- D a rise in interest rates on car loans
3A shop raises the price of a jacket from £50 to £55 and weekly sales fall from 400 to 360. The price elasticity of demand is:
- A −0.1
- B −10
- C +1.0
- D −1.0
4A survey finds that 30% of the users of a music app would cancel if its price rose by 15%. This suggests that demand for the app is:
- A price elastic, with a PED of about −2.0
- B perfectly elastic
- C unit elastic
- D price inelastic, with a PED of about −0.5
5Demand for a good is likely to be more price elastic when:
- A it is a necessity that households buy whatever its price
- B it is addictive
- C it has many close substitutes
- D it takes up only a small share of consumers' total income
6The demand for petrol is more price elastic in the long run than in the short run because:
- A petrol has no substitutes in the short run or the long run
- B over time consumers can switch to smaller, electric or more efficient cars
- C petrol becomes a smaller share of household spending
- D the number of petrol stations falls
7If demand for a good is price inelastic, a rise in its price will:
- A raise the firm's total revenue
- B lower the firm's total revenue, because fewer units are sold
- C raise the quantity demanded
- D leave total revenue unchanged
8At the midpoint of a straight-line, downward-sloping demand curve:
- A PED is zero and total revenue is at its maximum
- B PED is −1 and total revenue is at its minimum
- C PED is infinite and total revenue is zero
- D PED is −1 and total revenue is at its maximum
9Household incomes rise by 5% and sales of a brand of coffee pods rise by 8%. The income elasticity of demand is:
- A +1.6, so the pods are a normal good with income-elastic demand
- B +0.4, so the pods are a normal good with income-inelastic demand
- C −1.6, so the pods are an inferior good
- D +0.625, so the pods are a necessity
10A good with a negative income elasticity of demand is:
- A a luxury good, whose demand rises faster than income
- B a good with no substitutes
- C an inferior good, whose demand falls when incomes rise
- D a normal good, whose demand rises when incomes rise
11The cross elasticity of demand for butter with respect to the price of margarine is +0.8. This means that:
- A butter and margarine are complements: a 10% rise in the price of margarine cuts the quantity of butter demanded by 8%
- B butter and margarine are substitutes: a 10% rise in the price of margarine raises the quantity of butter demanded by 8%
- C the two goods are unrelated
- D a 10% rise in the price of butter raises the quantity of margarine demanded by 8%
12A vertical demand curve shows that:
- A demand is unit elastic at every point
- B the good is a necessity with many substitutes
- C any quantity can be sold at the going market price
- D the same quantity is demanded whatever the price
13A football club in the second tier is reviewing its ticket prices. Its stadium holds 24,000 and it has been selling about 18,000 tickets a match at £30. The commercial director believes lower prices would fill the ground and raise revenue, and has tested two lower prices at recent matches. Table 1 shows the results. Figures are illustrative.
| Ticket price | £30 | £27 | £24 |
|---|---|---|---|
| Tickets sold | 18,000 | 20,000 | 21,000 |
| Revenue | £540,000 | £540,000 | £504,000 |
(a)Using Table 1, calculate the price elasticity of demand for tickets when the price is cut from £30 to £27. [2]
(b)Using revenue calculations, explain whether the club should cut the price from £27 to £24. [4]
(c)With the aid of a diagram, explain why price elasticity of demand changes along a straight-line demand curve. [6]
(d)The club estimates that the income elasticity of demand for its tickets is +1.4 and the cross elasticity of demand for its tickets with respect to the price of a sports streaming subscription is +0.3. Explain what each figure tells the club, and how it might use the information. [6]
14Evaluate the usefulness of price elasticity of demand to a firm deciding what prices to charge. [20]
Answers
Show the answers
AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation.
| Answer | Why | |
|---|---|---|
| 1 | B | Price is on the axis, so a change in price moves the market along the curve; only a change in another factor shifts it. |
| 2 | C | Petrol is used with petrol cars, which are substitutes for electric cars; dearer petrol makes electric cars more attractive at every price. |
| 3 | D | Quantity falls by 10% (40 ÷ 400) and price rises by 10% (5 ÷ 50): −10 ÷ 10 = −1.0, unit elastic. |
| 4 | A | PED = −30 ÷ 15 = −2.0; a value larger than 1 in size means demand is elastic. |
| 5 | C | If buyers can switch easily, a small price rise loses many sales; the other three make demand less responsive. |
| 6 | B | In the short run drivers are locked into their cars and journeys; given time they can change vehicles, routes and habits. |
| 7 | A | Quantity falls by a smaller percentage than price rises, so price times quantity goes up. |
| 8 | D | Above the midpoint demand is elastic, below it inelastic; revenue rises as price falls towards the midpoint and falls after it. |
| 9 | A | YED = +8 ÷ 5 = +1.6: positive, so normal; above 1, so demand grows faster than income, a luxury in the economist's sense. |
| 10 | C | As people become better off they switch away from it towards better alternatives: own-brand goods and bus travel are common examples. |
| 11 | B | A positive XED means the goods are substitutes; the size shows how closely, and the direction runs from margarine's price to butter's demand. |
| 12 | D | Quantity does not respond to price at all: PED is zero, perfectly inelastic demand. |
13 (a) Using Table 1, calculate the price elasticity of demand for tickets when the price is cut from £30 to £27. [2: AO2 2]
- AO2 (1) Quantity rises by 2,000 ÷ 18,000 = 11.1%; price falls by 3 ÷ 30 = 10%
- AO2 (1) PED = 11.1 ÷ −10 = −1.11 (accept −1.1): just elastic, which is why revenue is unchanged at £540,000
13 (b) Using revenue calculations, explain whether the club should cut the price from £27 to £24. [4: AO2 2, AO3 2]
- AO2 (1) Revenue falls from £540,000 at £27 to £504,000 at £24, a loss of £36,000 a match
- AO2 (1) Between £27 and £24 PED = (+5%) ÷ (−11.1%) = −0.45: demand is price inelastic over this range
- AO3 (1) When demand is inelastic a price cut loses more revenue on the existing 20,000 buyers (£3 × 20,000 = £60,000) than it gains from the extra 1,000 tickets (£24,000), so revenue falls
- AO3 (1) The club should not cut to £24; £27 fills more seats at no loss of revenue and may raise spending on food, drink and merchandise, which is the better case for the lower price
13 (c) With the aid of a diagram, explain why price elasticity of demand changes along a straight-line demand curve. [6: AO1 2, AO2 1, AO3 3]
- AO1 (2) Diagram: a straight-line demand curve with the upper half labelled elastic, the midpoint unit elastic and the lower half inelastic; a total revenue curve beneath, rising, peaking under the midpoint and falling, earns credit but is not required
- AO3 (1) PED is the percentage change in quantity divided by the percentage change in price; on a straight line every £1 price change produces the same change in units, but the percentages differ because the starting points differ
- AO3 (1) Near the top of the curve the price is high and quantity small, so a given £ change is a small percentage of price and the same unit change is a large percentage of quantity: PED is large (elastic)
- AO3 (1) Near the bottom the reverse holds, so PED is small (inelastic); at the midpoint the two percentages are equal and PED is −1, where revenue is greatest
- AO2 (1) Application: the club's own figures show it, with PED falling from −1.11 between £30 and £27 to −0.45 between £27 and £24 as it moves down its demand curve
Levels: 1 to 2 for a description with a partly correct diagram; 3 to 4 for a correct diagram with the percentage reasoning; 5 to 6 for the full explanation applied to the table.
13 (d) The club estimates that the income elasticity of demand for its tickets is +1.4 and the cross elasticity of demand for its tickets with respect to the price of a sports streaming subscription is +0.3. Explain what each figure tells the club, and how it might use the information. [6: AO1 2, AO2 2, AO3 2]
- AO1 (1) YED of +1.4: tickets are a normal good with income-elastic demand; a 10% rise in local incomes would raise ticket demand by about 14%
- AO3 (1) So attendances are sensitive to the economic cycle: the club should expect demand to fall sharply in a recession and can plan prices, capacity and cash reserves accordingly, perhaps protecting sales with cheaper season tickets when incomes fall
- AO1 (1) XED of +0.3: the streaming subscription is a weak substitute for going to the match; a 10% rise in its price would raise ticket demand by about 3%
- AO3 (1) The positive sign tells the club that cheaper or better streaming will cost it some ticket sales, so it should watch streaming prices and the TV schedule when setting its own prices
- AO2 (2) Application: the small size of the XED means most fans do not treat television as a replacement for attending, so the club has some pricing power over them; combined with the PED figures from Table 1 it could price higher for big matches (where demand is inelastic) and lower for midweek games
14 Evaluate the usefulness of price elasticity of demand to a firm deciding what prices to charge. [20: AO1 6, AO3 6, AO4 8]
Knowledge and analysis (AO1 to AO3)
- Define PED and the link to revenue: with elastic demand a price cut raises total revenue, with inelastic demand a price rise raises it; show on a straight-line demand curve with the revenue curve beneath.
- Uses: choosing whether to raise or lower prices to increase revenue (a supermarket cutting the price of a product with many substitutes, a rail operator raising peak fares); price discrimination, charging more where demand is inelastic (peak travel, business flights) and less where it is elastic (students, off-peak); predicting the effect of an indirect tax or a cost rise on sales and on how much can be passed on; forecasting sales when a rival changes price (with XED) or incomes change (with YED).
- PED also tells the firm about its market power: a firm facing highly elastic demand is close to a price taker and should compete on cost; a firm facing inelastic demand has scope to raise margins or invest in brand loyalty to make demand less elastic.
- Limits: PED estimates come from past data or surveys and may be unreliable (the cigarette studies ranged from −0.27 to −0.89); PED changes along the demand curve, so a figure estimated at one price does not hold at another; it changes over time as substitutes appear; other things do not stay equal (rivals react, incomes and tastes change), so the measured response mixes several causes.
- Revenue is not profit: a price cut that raises revenue may raise costs more if output rises, so a firm needs marginal cost as well as PED; the profit-maximising rule is MC = MR, and PED alone cannot find it.
- Firms may have other objectives (market share, sales growth, filling capacity, reputation) for which revenue effects are only one consideration; and for a new product there is no demand data to estimate PED from.
Evaluation (AO4)
- It depends on how reliable the estimate is: large, data-rich firms (supermarkets, airlines, streaming services) measure PED continuously and use it well; small firms guess.
- It depends on the market: in oligopoly the response of rivals matters more than the elasticity of the firm's own demand curve, which shifts when rivals react.
- It depends on the firm's objective: for revenue maximisation PED is the key number; for profit maximisation it is necessary but not sufficient.
- Short run versus long run: a price rise that raises revenue now may lose customers over time as substitutes appear and habits change.
- PED is most useful alongside YED, XED and cost information, as a set of tools rather than a single answer.
Judgement
A supported judgement might conclude that PED is very useful as a guide to the direction of price changes and to price discrimination, especially for firms with good data and some market power, but that it is an estimate that changes with price, time and rivals' behaviour, and it says nothing about costs; a firm that priced on PED alone would often be wrong about profit.
Marking
Bands, out of 20 (AO1 knowledge 6, AO3 analysis 6, AO4 evaluation 8, as WJEC marks a 20-mark question). Top band (16 to 20): a range of points developed in full chains of reasoning, supported by an accurate diagram and real examples, with evaluation that weighs the arguments and reaches a judgement that depends on stated conditions. Middle band (9 to 15): some developed chains, a relevant diagram, evaluation present but one-sided or asserted. Bottom band (1 to 8): points listed or described, little use of theory or examples, judgement missing or unsupported.