Economics (AS & A Level) · Oct / Nov 2021 · Paper 23 · Question 3

a bad idea for a firm producing a product that constitutes a large proportion of household income, and

a good idea for a firm producing a product that constitutes a small proportion of household income. For knowledge and understanding, meaning of PED (1)

plus an accurate formula (1)

(up to 2 marks) And application: For explanation of the effects on revenue where PED is elastic (i). For a product that constitutes a large proportion of household income this means that the PED will most likely be elastic (1)

which means (1)

so revenue is likely to fall (1)

(up to 3 marks) For explanation of the effects on revenue where PED is inelastic (ii). For a product that constitutes a small proportion of household income this means that the PED is likely to be inelastic (1)

which means (1)

so revenue is likely to rise (1)

(up to 3 marks) Where PED is elastic, an increase in price will lead to less revenue A firm with an inelastic PED will experience an increase in its revenue if it increases the price of its product Note: simple explanations of the impact of elasticity should not be credited, e.g. an increase in price leads to a large fall in demand/no change in demand. The answer must refer to % or proportional changes