Refer to Table 1.2. Calculate the price elasticity of demand for shopping tours.

Mark scheme

Marking points from the official mark scheme (May/June 2023). The mark or mark type is shown in brackets.

1. [1] PED = % change in quantity demanded / % change in price
2. [1] % change in quantity demanded = -10/250 × 100 = -4%
3. [1] % change in price = $15/$60 × 100 = 25%
4. [1] PED = – 4% / 25% = − 0.16
5. [K] Knowledge and meaning of PED: responsiveness of demand to a change in price
6. [K] Generic knowledge of values and meaning of price elastic/price inelastic demand
7. [K] Knowledge of pricing methods such as cost plus and competitive pricing (penetration and skimming not so relevant here as these are existing products)
8. [APP] Demand for shopping and markets tours is inelastic, whereas demand for street food tour is elastic.
9. [APP] Shopping and markets tours are often taken by cruise passengers, who may be less sensitive to price changes than the backpackers who take the street food tours.
10. [APP] Pricing should take into account the nature of the target market and also the alternatives on offer to them, for example the shore excursions offered to cruise passengers.
11. [APP] Pricing of tour will also need to reflect changing prices of arrangements such as transport and entry tickets.
12. [APP] Seasonal fluctuation may mean that it is necessary to offer 'special deals' at quiet (non-peak) times of year.
13. [AN] Price inelastic demand for shopping tours suggests that passengers are relatively insensitive to price increases, therefore raising price should increase revenue. For example, the price rise illustrated would increase revenue from $15 000 to $18000.
14. [AN] Price elastic demand for street food tours suggests that passengers are relatively sensitive to price increases, therefore raising price should decrease revenue. For example, the price rise illustrated would decrease revenue from $12 000 to $9000.
15. [AN] In the case of the new small group tours, demand may well be relatively inelastic, due to customer perception of more specialised tours with smaller groups, could support higher pricing decisions leading to increased profit.
16. [EVAL] It will be important for LT to keep information on the types of customers who take each of the tours, so that they can make pricing decisions with this in mind.
17. [EVAL] The PED will change over a range of prices. For example, if LT increase the prices of shopping tours by a very large percentage then they will no longer be seen as 'value for money'.
18. [EVAL] Currency fluctuations may affect tour prices, if the currency of Country P appreciates or depreciates.
19. [EVAL] Other external factors that affect tourism will also have some impact on LT's ability to charge higher prices.
20. [EVAL] LT objectives – to what extent might LT be willing to accept lower profit margins on tours such as the street food tour to widen customer appeal?
21. [EVAL] How dependent are LT on the cruise company? Prices need to be competitive in the market.