6a.

Distinguish between price elasticity of demand (PED) and income elasticity of

demand (YED)? [10 marks]

Responses could include the following:

An explanation of the difference between the two concepts, that while PED represents the
relationship between the price and quantity demanded of a good or service, YED represents
the relationship between income and demand for a good or service.

Firstly, price elasticity of demand can be

defined as the impact on quantity
demanded for a good or service when the
price of that good changes and is
represented by the first diagram:

PED for a product is measured by the

formulae: % change in demand / % change
in price, with the range of values as
follows:

Goods and services with a PED > 1 are

price elastic with respect to demand, while
those with a PED < 1 are
inelastic. Products with a PED = 1 are
unitary, meaning that the change in
quantity demanded for a good or service is equal in size to the original change in selling
price. The % change in quantity demand will be greater than the initial change in price for
PED elastic goods and services and less than the original price for PED inelastic products.

Examples of goods with high PED elasticity include luxury or high-priced items as well as
those with many close substitutes and / or relatively few compliments, e.g. luxury cars.

Examples of goods with low PED elasticity

include basic or low-priced items as well as those
with many few close substitutes and / or a
relatively high number of compliments e.g. bread
or tobacco products.

Goods and services with a combination of the

above characteristics may be unitary in price
elasticity e.g. second hand cars which are neither
a luxury or basic item and may well have a PED
close to 1.

By contrast, diagrams two and three illustrate

YED which shows the relationship between
consumers income and demand for different products. On the second diagram (above),

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demand for a luxury good is illustrated. Demand for the good rises more than proportionately
when incomes increase (Q1–Q2 > Y1-Y2) as we would be expect for any luxury
product. Consumers are easily able to abstain from purchasing the good or service when
incomes are squeezed but when incomes rise, consumers are likely to spend a significant
proportion of the additional income on luxury goods and services.

By contrast, diagram three (below),

represents the income elasticity of demand
for a YED inelastic good or service – likely a
necessity good or service. As incomes in the
economy rise consumers increase their
consumption of the product, but by a smaller
proportion than the rise in income. More
advanced responses may also note that the
steeper the slope of the product, the lower the
level of YED elasticity.

The formulas for YED are as follows:

A product with a YED > 1 are YED elastic,

with products that have an YED < 1 would be
income inelastic. Goods and services with a
YED = 1 are unitary YED elastic. Lastly,
products with an YED < 0 are inferior goods, meaning that demand for these products falls as
income rises as consumers switch their consumption to higher priced substitutes.

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InThinking www.thinkib.net/Economics 2
Responses in this section should be graded according to the following mark bands:

Maximum mark 10

Criteria Mark
There is no clear answer to the question but some limited: 1-2
• Use of economic terms - PED and YED
• Application of economic theory
• Use of diagrams
There is a vague answer to the question with limited: 3-4
• Use of economic terms - PED and YED
• Application of economic theory
• Use of diagrams – at least one diagram is included
There is an answer to the question with satisfactory: 5-6
• Use of economic terms - PED and YED
• Application of economic theory - the response contains a clear
understanding of the distinction between PED and YED and
provides examples of products with different values
• Use of diagrams - each diagram is explained in the context of the
relationship between the relevant products
• The response contains some relatively minor errors or omissions
There is a clear answer to the question with good: 7-8
• Use of economic terms - both terms are defined or correctly and
each is illustrated with a suitable diagram, well explained and
correctly labelled
• Application of economic theory
• Examples of products with different PED and YED values
• The response may contain the range of values and formulas for both
PED and YED elasticity
• Use of diagrams - each diagram is explained in the context of the
relationship between the relevant products
• The response may contain a few some relatively minor errors or
omissions and the overall quality of the response is good
There is clear answer to the question with excellent: 9-10
• Use of economic terms - PED and YED
• Application of economic theory
• Examples of products with different PED and YED values
• The response contains the range of values and formulas for both
PED and YED elasticity
• Use of diagrams - each diagram is explained in the context of the
relationship between the relevant products
• The response contains only a few minor errors or omissions and the
overall quality of the response is excellent

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InThinking www.thinkib.net/Economics 3
b. Using real World examples, discuss how firms can use price elasticity of demand
(PED) and income elasticity of demand (YED) analysis to increase their sales
revenue. [15 marks]

Command term: Define which requires a response that considers a range of arguments and
hypotheses.

Responses could include the following:

Key terms to define: PED, YED and sales revenue but candidates should note that definitions
included in part (a) of the response do not need to be repeated, providing they refer to their
earlier definition in this part of the response.

Responses should also include a diagram illustrating both YED and PED, although
alternatively responses might simply refer to the diagrams already drawn in the part (a) of the
response.

An explanation of how businesses may use YED and PED theory to increase their sales
revenue, including the following:

For example, a business may use YED theory to raise sales by switching production to luxury
products in periods of economic growth. This might involve, for instance, product updates or
a new range of products aimed at higher income consumers.

Equally businesses may introduce a greater range of budget products during times of
recession / economic stagnation.

An explanation of how businesses can also use PED theory to increase their sales revenue.
This can be illustrated with diagrams showing the impact of a change in the price of a good
and services with different price elasticities.

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InThinking www.thinkib.net/Economics 4
This is illustrated by the diagrams above. In diagram 1, a good has inelastic PED and so any
rise in selling price will result in a small change in quantity demanded. Therefore, in this
example a rise in price will increase the sales revenue of the firm, represented on the diagram
by the revenue gain (orange area) being greater than the green area, the revenue lost.
Similarly, a fall in price will lead to a loss of revenue.

By contrast, if the good or service has elastic PED (diagram on the right) then a fall in the
price will lead to a greater rise in demand, increasing sales revenue. This is shown on the
second diagram by the rise in demand from Q1 to Q2 being greater than the revenue lost from
the fall in price from P1 to P2. By contrast a rise in price will lead to a larger fall in demand
and a fall in sales revenue.

Unitary elastic goods, sometimes called uniform or unit elastic goods will see no change in
revenue following a change in price. This is because any change in revenue per unit will be
exactly matched by the change in quantity demanded.

Examples of real-world examples that might be used in completing this question might
include:

Cigarette businesses raising prices steadily over a period of time and without a significant fall
in quantity demanded for the product they have seen their revenues rise

The organisers of overly subscribed events such as pop concerts and festivals raising prices
and revenue for the organisers

The providers of smart phones providing newer (and more expensive) products over time and
Tesco offering a 1p range aimed at lower income consumers.

The best responses should also recognise that firms may be forced to change prices due to
external influences over which they have little control. Examples might include a change in
production costs or market conditions.

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InThinking www.thinkib.net/Economics 5
Responses in this section should be graded according to the following mark bands:

Maximum mark 15

Criteria Mark
There is no clear answer to the question but some limited: 1-3
• Definition of YED and PED
• Application of economic theory
• Use of diagrams
• Evaluation
• Real examples
There is a limited answer to the question with limited: 4-6
• Definition of YED and PED
• Application of economic theory
• Use of diagrams
• Evaluation
• Real examples
There is a satisfactory answer to the question with satisfactory: 7-9
• Definition of YED and PED
• Application of economic theory
• Use of diagrams that explain how the change made on each diagram can
increase sales revenue
• Evaluation
• Real examples (for both PED and YED) included
There is a good answer to the question with good: 10-12
• Definition of YED and PED
• Application of economic theory
• Use of diagrams that explain how the change made on each diagram can
increase sales revenue
• Evaluation
• Real examples (for both PED and YED) to illustrate the work and
applies each appropriately to the response
There is an excellent answer to the question with excellent: 13-15
• Definition of YED and PED
• Application of economic theory
• Use of diagrams that explain how the change made on each diagram can
increase sales revenue
• Evaluation
• Real examples (for both PED and YED) to illustrate the work and
applies each skilfully to the response

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InThinking www.thinkib.net/Economics 6