2.7 Price elasticity of demand (PED)

The shape of Colombia's population pyramid is changing. The income distribution of this South American country, however, is not changing significantly. The country has one of the most unequal income distributions in the world. Some Colombians work in its footwear industry which produces shoes, sandals and boots. Although footwear is produced in the private sector, Colombia has a mixed economic system.

c) Analyse the influences on whether demand for shoes is elastic or inelastic. [6]

In 2021, the Suez Canal was blocked by one of the world's biggest container ships. This affected some firms' profits and caused a shortage in a number of products. The delivery of luxury chocolate and salt, for example, was delayed. These two goods have differences in their price elasticity of demand. The disruption to international trade created particular difficulties for those countries which import most of the food they consume.

c) Analyse the reasons why the price elasticity of demand for one brand of luxury chocolates is likely to be different from that of salt. [6]

Serbia is the world's second largest producer of raspberries, a product with elastic demand. Consumers experience the economic problem when buying raspberries. Few raspberry farm workers are members of trade unions. Membership of trade unions in Serbia has fallen to 20% of all workers by 2020. In that year, Serbia had more state pensioners than workers.

a) Identify two determinants of price elasticity of demand. [2]

The demand for smartphones has become more price-inelastic as the range of functions available has increased. In low-income countries, smartphones are an important tool for economic development. This is because they provide access to education and banking services which were once not available in rural areas. Smartphones have made it easier for people to borrow and save their money.

c) Analyse the advantages of selling a product which is price-inelastic in demand. [6]

In the Netherlands in 2018, there were 1.3 bicycles per person and the world's largest underground bicycle parking area was built in the capital city. Land is scarce in city centres, where most cycling takes place. Demand for bikes in the Netherlands is price-inelastic. Only a few people in the Netherlands borrow money to buy bikes. The government encourages cycling by spending on both bike parking areas and leisure cycle parks.

b) Explain two reasons why demand for a product may be price-inelastic. [4]

Italy is home to the world's oldest bank and some of the world's oldest car producers. Internationally, both industries are facing a number of challenges. The wages of bank workers and car workers are increasing. Demand for bank loans and for cars is changing, in part, due to changes in population size. It is predicted that the price elasticity of demand (PED) for cars will also change in the future.

d) Discuss whether or not demand for cars will become more price-elastic in the future. [8]

The Indian government has declared that the country, now a major car producer, will sell only electric cars by 2030. The government wants to reduce external costs, some of which are caused by petrol and diesel cars. Demand for electric cars is currently relatively low and price-elastic. The government, however, thinks that it will not need to subsidise the production of electric cars to achieve its target.

b) Explain two influences on whether demand for a product is price-elastic or price-inelastic. [4]

Droughts in the Pacific Coast region of the US and regulations, in the form of limits on the amount of salmon that can be caught in the wild, have reduced the supply of wild salmon. These limits were imposed to avoid market failure in the salmon market. However, the effect of this on the revenue of salmon producers is uncertain. In addition, producers of farmed salmon in the US states of Washington and Alaska have received subsidies from the US government.

c) Analyse how information on changes in a firm's revenue can be obtained from price elasticity of demand calculations. [6]

In the UK, bus journeys outside London have fallen by nearly 40% since 1980. This fall in demand has been largely due to a rise in bus fares, a rise in income and changes in the price and quality of substitutes. On some routes there are monopolies operating and this lack of competition can push up the price.

c) Analyse how price elasticity of demand for a product influences the revenue a firm receives. [6]

Taxi drivers usually have to buy a license to carry passengers. The relatively high fixed cost of the license discourages some people from becoming taxi drivers. Encouraging more people to be taxi drivers would be likely to reduce taxi fares and unemployment. It may, however, increase traffic congestion.

c) Analyse how a taxi firm can use information about price elasticity of demand for its service. [6]