Explain two reasons why the demand for manufactured goods might be price elastic.

Evaluate the importance of cross price elasticity of demand for a business selling a good if the price of a related good increases.

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

Answers may include:

• definitions of PED, price elastic, demand
• diagram to show a relatively elastic demand curve, elastic section on a demand curve
• explanation of two determinants of the elastic demand of manufactured goods, including: the number and closeness of substitutes, the degree of luxury/necessity, time and the proportion of income spent on the good
• examples of manufactured goods with a relatively price elastic demand.

NB Candidates who only explain one reason should not be awarded marks beyond level 2.

PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.

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

Answers may include:

• definition of cross price elasticity of demand (XED)
• diagram to show the significance of XED on the shift in demand that results from any change in price
• explanation of the impact of XED on businesses if the price of complements and substitutes for a good they produce changes in terms of price, quantity, revenue and profit
• examples of products that have substitutes and complements
• synthesis or evaluation.

Evaluation may include: the relative size of XED and the extent to which the revenue and profit will rise or fall; the assumption that other factors affecting demand remain constant and that XED is difficult to predict and measure.