Explain how the price elasticity of demand for a good might be affected by the number and closeness of substitutes.

Examine the significance of price elasticity of demand for the decision making of firms and government.

Answers may include:

• definitions of price elasticity of demand and substitutes
• diagram of goods with different price elasticities of demand.
• explanation that the more close substitutes a good has the more price elastic its demand tends to be
• examples of how the number of substitutes a good has affects its price elasticity of demand.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of price elasticity of demand (PED)
• diagram to show how total revenue/tax revenue changes when price/tax changes
• explanation that a change in price will lead to a fall/rise in total revenue/tax revenue depending on the value of PED
• examples of goods where a change in price does lead to a rise/fall in total revenue/tax revenue
• synthesis or evaluation (examine the significance).

Examination may include: situations where a change in price would not lead to a rise/fall in total revenue/tax revenue, different price elasticities, other factors affecting demand that cause a change in total revenue/tax revenue, the impact of time on PED when price changes. Responses which consider the significance of PED for firms or government only (not both) should not be rewarded above Level 2

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.