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Consumer Behaviour & Demand — Exam Questions & Model Answers

Section 1.3.2 — Annotated model answers for price elasticity of demand, consumer behaviour, and demand analysis questions.

Economics · WEC11 · Unit 1 · 1.3.2

Exam questions

Every question here carries a tariff that exists in IAL Economics. Open the mark scheme before the model answer and you will see what the examiner is paid to look for.

  1. Explain4 marksAO1 · AO25 min

    Explain what is meant by price elasticity of demand (PED) and why it is important to a firm.

    Mark scheme
    1–2 marks
    Definition of PED (responsiveness of quantity demanded to a change in price)
    3–4 marks
    Application to firm's decision-making (pricing strategy, revenue implications)
    Model answer — 4 / 4
    What the marks in the margin meanKKnowledge/DefinitionAApplication
    Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price. K It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If PED > 1, demand is price elastic; if PED < 1, demand is price inelastic. K

    PED is important to firms because it determines the impact of a price change on total revenue. A For example, if a firm sells a product with inelastic demand (e.g. insulin), it can raise prices and increase revenue because the fall in quantity demanded will be proportionally smaller than the price rise. Conversely, a firm selling a product with elastic demand (e.g. a branded chocolate bar with many substitutes) would lose revenue by raising prices, as consumers would switch to alternatives. A
    Examiner commentary
    Full marks require a clear formula or verbal definition of PED and an explanation of why it matters to a firm — typically through its link to total revenue. Examiners reward candidates who distinguish between elastic and inelastic demand with concrete examples rather than just stating the definition.

  2. Examine8 marksAO1 · AO2 · AO3 · AO411 min

    Examine how knowledge of income elasticity of demand (YED) might be useful to a business.

    Mark scheme
    Examine (8)
    Appendix 6: Requires knowledge, understanding, application, analysis and evaluation. Requires an explanation which includes a chain of reasoning, and diagrams where appropriate. Focuses on depth rather than breadth. Any relevant data provided needs to be interpreted. There should be a brief assessment of the arguments/factors/evidence.
    Level 1 — 1–2 marks
    Isolated knowledge and understanding. No application to the context and no chain of reasoning.
    Level 2 — 3–4 marks
    Knowledge applied to the context. A chain of reasoning is begun but not carried through; any data given is described rather than interpreted.
    Level 3 — 5–6 marks
    A developed chain of reasoning in context, with a diagram where one is appropriate. Depth rather than breadth; data interpreted. Assessment is implied rather than made.
    Level 4 — 7–8 marks
    A developed chain of reasoning in context AND a brief assessment of the arguments, factors or evidence — the clause that separates Examine from Analyse.
    Indicative content
    Knowledge: definition of YED, normal vs inferior goods. Application: relevant examples of products with different YED values. Analysis: how YED informs pricing, product range, marketing, and investment decisions during economic cycles.
    Model answer — 5–6 / 8
    What the marks in the margin meanKKnowledgeAApplicationAnAnalysis chain

    Para 1

    Income elasticity of demand (YED) measures the responsiveness of demand to a change in income, calculated as the percentage change in quantity demanded divided by the percentage change in income. K A positive YED indicates a normal good (demand rises with income), while a negative YED indicates an inferior good (demand falls as income rises). K

    Para 2

    Knowledge of YED is valuable for forecasting demand during the business cycle. An A firm selling luxury goods with a YED significantly greater than 1 — such as BMW or high-end fashion brands — can expect demand to rise sharply during a boom but fall steeply in a recession. A Conversely, budget retailers like Aldi have products with negative YED — their demand actually increases during recessions as consumers trade down from premium brands. A

    Para 3

    This information helps businesses plan their product portfolio and investment strategy. A company operating in a high-YED market might diversify into lower-YED product lines to reduce vulnerability to economic downturns. An It also informs marketing budgets — during periods of rising GDP, firms with luxury products should increase advertising spend to capture the surge in demand, while during downturns they should shift focus to value messaging. An Additionally, YED data helps with long-term capacity planning — a firm in a rapidly growing economy should invest in expanding production if its products have high positive YED, as demand will grow faster than income. An
    Examiner commentary
    Four distinct business uses of YED — forecasting, product portfolio, marketing spend and capacity planning — each developed, with the BMW and Aldi contrast giving strong application. It stays at Level 3 because the usefulness is asserted throughout and never assessed. A Level 4 needs one qualification: YED values are estimates from past data and move with tastes, and a pricing decision needs PED as well, so YED informs the decision rather than making it.

Data response: Demand Elasticity — India telecoms price rises

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