2014 Nov (PED, XED) Paper 3 HL

2014 Nov (PED, XED) Paper 3 HL

(e) (i) Calculate the PED for Good A when the price falls between Jan. 2014 and Feb. 2014.

 

Price is originally at $8 and falls to $6 and the Qd increases from 160 to 220

(ii) Calculate the Cross Price Elasticity of Demand (XED) between Good A and Good B when the price of Good A falls between Jan 2014 & Feb 2014.

 

When the price of Good A falls the demand for Good B also falls, this is a positive (direct) relationship and implies that the two goods are Substitutes.

(iii) Calculate the XED between Good A & Good C when the price of Good A falls.

 

When the price of Good A falls the demand for Good B also increases from 100 to 150, this is a Negative (indirect) relationship and implies that the two goods are Complements.

(f) Using your answers to part (e) explain the relationship between Good A and Good B, and between Good A and Good C.

 

An accurate explanation uses the sign of the XED and explains that if positive the two goods A & B are substitutes as the price of one and the Qd of the other move in similar directions but if negative as in the case of Good A and Good C they are complements as the price of the one and the Qd of the other move in opposite directions.

(g) Good J & Good K are both produced in Zestria. The PED for J, a primary commodity is -0.2 (inelastic). The PED of Good K, a manufacturing good is -2.3 (elastic).

 

Explain 2 reasons why the demand for products such as Good K tends to be relatively price elastic compared to the demand for products such as Good J.

 

Fewer Substitutes for Primary Products  = Demand would be relatively price inelastic. However, manufactured products tend to have elastic demand because there are likely to be more substitutes owing to the greater opportunity for product differentiation.

Greater % Income spent on Manufacturing Goods = tends to represent a considerable part of consumer income. As a result, demand would be relatively price elastic. However, spending on primary commodities is likely to take a smaller proportion of income causing demand to be relatively price inelastic.

 

Primary Commodities are often necessities and hence demand would be price inelastic. Manufacturing goods are more likely to be luxuries and therefore demand would be more price elastic.

2018 May (PED/XED) Paper 3 HL

2018 May (PED/XED) Paper 3 HL

(e) Widgets and Pidgets have negative cross price elasticity of demand (XED)

Explain how the demand function for Widgets, Qd = 249 – 4P, is likely to change as a result of an increase in the price of Pidgets.

 

A Negative (XED) implies that the two goods are complements, so as the price of Pidgets increase the demand for widgets will decrease.

The demand for widgets will decrease and therefore the “a term” intercept or horizontal intercept or Q-intercept will decrease.

 

(f) Outline the meaning of the term unit elastic demand.

 

A change in the price of a product results in a proportionate (equal percentage) change in the quantity demanded.

 

 

(g) Explain the two determinates of PED.

 

Necessity – demand will be inelastic, as consumers will attempt to avoid reducing consumption, while any reduction is likely to be proportionally smaller than the change in price.

Substitutes – the more substitutes, demand will be price elastic as an increase in the price of the product is likely to lead to consumers switching to alternatives, causing the Qd (of the good) to decrease significantly.

Proportion of Income – if the price represents a small proportion of income, demand will be price inelastic, as a change in price will have little impact on the ability of the consumer to purchase the product.

Time – Consumers are more able to react to changes in price if they have more time, so demand is more price-elastic in a longer time period.