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Economics IGCSEPDF 35
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The demand for flat screen televisions has increased enormously in many countries and this
has had
an effect on the market.
(a) Explain what is meant by price elasticity of demand. [4]
(b) Discuss the potential usefulness of price elasticity of demand to a manufacturer of flat
screen televisions.[6]
(a) Up to 2 marks for definition:
PED is the percentage change in the quantity demanded of a product (1) divided by the
percentage change in its price (1)
Or
PED is the responsiveness of demand (1) to a change in price (1).
Up to 2 marks for expansion:
Its value can range from perfectly inelastic (1) to perfectly elastic (1) inelastic demand has a
valué of less than 1 (1) elastic demand has a value of more than 1 (1) and it is usually a minus
figure (1) varies along the demand curve (1).
Note: maximum of 4 marks.
(b)
It will give guidance to the firm if it is thinking about changing the price (1)
• if PED is elastic, a price reduction will increase revenue (1) additional mark for development of
this point e.g. as demand will rise by more than price (1)
• if PED is inelastic, a price rise will increase revenue (1) additional mark for development of this
point e.g. as demand will fall by less than price (1)
Limitations:
• may be difficult for the manufacturer to calculate accurately (1)
Producers can calculate the PED of their product and take a suitable action to make the product
more profitable.
Revenue is the amount of money a producer/firm generates from sales, i.e., the total number of
units sold multiplied by the price per unit. So, as the price or the quantity sold changes, those
changes have a direct effect on revenue.
If the product is found to have an elastic demand, the producer can lower prices to increase
revenue. The law of demand states that a price fall increases the demand. And since it is an
elastic product (change in demand is higher than change in price), the demand of the product
will increase highly. The producers get more revenue.
If the product is found to have an inelastic demand, the producer can raise prices to
increase revenue. Since quantity demanded wouldn’t fall much as it is inelastic, the high prices
will make way for higher revenue and thus higher profits.
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