Define the term 'price elasticity of demand'.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Price elasticity of demand (PED) measures the degree of responsiveness of demand
2. [1] to a change in the price of the product/service.
3. [2] PED = % change in quantity of demand for a product / % change in price of the product
4. Allows a business to anticipate the reaction of its customers to a change in price and to forecast the level of sales following a change in price
5. Pricing strategies (e.g. price discrimination) are influenced by an understanding of how demand might be affected by price changes
6. Maximises revenue, i.e. price inelastic – revenue rises when price of product increases; price elastic – revenue rises when price of product falls
7. Helps a business to decide on its pricing policy, e.g., a product with a PED greater than 1; a change in the price of the product would result in a percentage change in the level of demand which is higher than the percentage change in price. This might lead a business towards competitive pricing
8. A business can use the knowledge that demand for their product is inelastic to know that an increase in the price would lose proportionately fewer customers than the price increase. Businesses that provide goods that customers view as essential know that an increase in price will not harm demand significantly