Section 1.3.2 — Annotated model answers for price elasticity of demand, consumer behaviour, and demand analysis questions.
These model answers demonstrate how to structure responses for Edexcel International A-Level (IAL) Economics and Business exams. Each answer includes a mark scheme breakdown, PEEL structure (where applicable), annotated paragraphs, and examiner commentary explaining what earns marks at each band.
Explain: what is meant by price elasticity of demand (PED) and why it is important to a firm.
Mark Scheme Breakdown
1–2 marksDefinition of PED (responsiveness of quantity demanded to a change in price)
3–4 marksApplication to firm's decision-making (pricing strategy, revenue implications)
KKnowledge/Definition
AApplication
Model Answer
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.
Likely Score4 / 4
8 marks
Unit 1 · 1.3.2 Consumer Behaviour & Demand · Analysis
Analyse: how knowledge of income elasticity of demand (YED) might be useful to a business.
Mark Scheme Breakdown
1–2 marksKnowledge: definition of YED, normal vs inferior goods
3–4 marksApplication: relevant examples of products with different YED values
5–8 marksAnalysis: how YED informs pricing, product range, marketing, and investment decisions during economic cycles
PEEL Structure
P
Point
YED helps firms predict how demand for their products will change as the economy grows or enters recession.
E
Evidence
E.g. luxury car brands like BMW face elastic YED; budget supermarkets like Aldi have negative YED.
E
Explain
During a boom, firms with high YED products see demand surge. During recession, they face sharp falls — so they may diversify into lower-YED products to stabilise revenue.
L
Link
Understanding YED allows firms to make informed decisions about product mix, pricing strategy, and risk management across the business cycle.
KKnowledge
AApplication
AnAnalysis chain
Model Answer
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
This answer goes beyond simply defining YED to show how it practically informs business decisions — forecasting, product portfolio, marketing, and capacity planning. The BMW/Aldi contrast provides strong application. To reach top marks, consider adding how YED interacts with PED in pricing decisions.
Likely Score7–8 / 8
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Browse all Edexcel IAL Economics & Business model answers with mark scheme breakdowns and examiner commentary.