Explain why the price elasticity of demand for primary commodities is often relatively low while the price elasticity of demand for manufactured goods is often relatively high.

Discuss the importance of price elasticity of demand and cross price elasticity of demand for a firm’s decision making.

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

Answers may include:

• definitions of PED, primary commodities, manufactured goods 
• diagram(s) to show low (inelastic) demand for primary commodities and high (elastic) demand for manufactured goods
• explanation of low PED for primary commodities and high PED for manufactured goods in terms of the number and closeness of substitutes, degree of necessity and proportion of income spent on the good
• examples of primary commodities with a relatively low PED and manufactured goods with a relatively high PED.

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:

• definitions of PED and XED
• diagram(s) to illustrate PED and XED
• explanation of the importance of PED estimates in terms of the impact on total revenue of price changes and the importance of XED estimates in terms of changes in the price of substitutes and complements
• examples in practice of the importance of PED for business revenue when price changes and the importance of XED when there are changes in the price of substitutes or complements
• synthesis or evaluation (discuss).

Discussion may include: the difficulty of obtaining reliable estimates in reality due to imperfect information, past data not necessarily being a guide to the future, the unreliability of consumer survey techniques, the problem of estimating variables that are not constant and the impact of factors other than the price of the good and the price of other goods.

Award a maximum of [9] if only PED or only XED is addressed.

There were many good responses to this question with good explanations of the difference between the price elasticity of demand of primary commodities and manufactured goods, The best answers gave detailed coverage of how commodities are more likely to be necessity goods with relatively few substitutes compared to manufactured goods, which makes the demand for commodities relatively price inelastic. The best answers used effective real-world examples to illustrate the points made. 

Many students produced good responses on how price and cross price elasticity of demand are important to firms in terms of changing price to increase revenues and responding to the price changes of related goods. Many candidates used effective diagrams and real-world examples to illustrate their answers. A weakness in answers was many candidates did not evaluate the points they made. A strong answer in this section would include discussion of the problems of measuring price and cross price elasticity of demand because the values change over time and any measurement of elasticity assumes that other factors affecting the demand for a good remain constant.