Price Elasticity of Demand: Determinants and Business Applications

Tick each line you got. Your score builds from the marks on the scheme.

• correct PED calculation, PED = -25% / 10% = -2.51 mark
• correct sign interpretation, negative as expected for a normal good1 mark
• correctly identifies demand as price elastic since the size of PED (2.5) is greater than 11 mark
• links elastic demand to the presence of substitutes, e.g. many other breakfast cereal brands are likely available1 mark
• explains the mechanism, since close substitutes are available, a 10% price rise makes consumers switch away in large numbers1 mark
• notes this differs from an inelastic good, e.g. a cereal with strong brand loyalty would show a smaller percentage fall in demand for the same price rise1 mark

Nothing ticked yet - 6 available

Tick each line you got. Your score builds from the marks on the scheme.

• basic, undeveloped assertion, e.g. PED tells firms what happens to sales, with little development or calculation.2 marks
• one or more developed chains linking PED to the pricing/revenue decision, but one-sided or with limited evaluation of the concept's limits.2 marks
• balanced chains on both the usefulness and the limitations of PED for this decision, with a supported judgement.2 marks
• Specific content: chain (useful) - if a firm knows demand for its product is price inelastic, it can predict that raising price will increase total revenue, since the percentage fall in quantity demanded will be smaller than the percentage price rise.2 marks
• Specific content: chain (useful) - conversely, if demand is price elastic, PED tells the firm that raising price would reduce total revenue, so it may compete on price or non-price factors instead.2 marks
• Specific content: chain (limitation) - PED estimates are usually based on past data and assume other conditions stay constant, but in reality these often change at the same time as price, e.g. a rival cutting its own price simultaneously.2 marks
• Specific content: chain (limitation) - PED can change over time, often becoming more elastic in the long run, and can differ across customer segments, so a single PED figure may be too simplistic for a varied customer base.1 mark
• Specific content: evaluation - PED is more useful for firms with reliable, up-to-date data and stable market conditions, and less useful for new products with no sales history or where competitors' reactions are likely to shift the demand curve itself.1 mark
• Specific content: judgement - a supported conclusion that PED is a genuinely useful starting point for pricing decisions, but should be combined with other information rather than used as the sole basis for the decision.1 mark

Nothing ticked yet - 15 available