There are a number of competing producers of jeans. These firms are now also facing competition from new sportswear designed to also be worn as leisurewear. This increased competition has made demand for jeans more price-elastic. For instance, a government report has estimated that the price elasticity of demand for one of the oldest firm's jeans in Asia is – 2.5.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2016). The mark or mark type is shown in brackets.

1. [2] (a) It means that a 1% rise in price (1) would cause a 2.5% fall in demand (1). It means demand is elastic (1) a change in price results in a greater percentage change in demand (1).
2. [4] (b) Knowledge of PED would help a government estimate how much tax revenue (1) it may earn from indirect taxes/changes in indirect taxes (1) may earn more on products with inelastic demand (1). Knowledge of PED may help a government to estimate how much of a subsidy to give (1) a subsidy will have more of an impact on quantity (1) if demand is elastic (1). Knowledge of PED will help a government estimate how successful it may be in reducing consumption of a product (1) example, e.g. cigarettes (1) more likely to be successful if demand is elastic (1). Knowledge of PED may influence the price the government charges for the products it supplies (1) example of a product (1).
3. [6] (c) Up to 4 marks for the diagram: • axis correctly labelled – price and quantity or P and Q (1) • demand and supply curves correctly labelled (1) • demand curve shifted to the right (1) • correct equilibrium points clearly identified, e.g. E and E1 (1). Up to 2 marks for written explanation: • the two types of products are substitutes (1) • people switch demand between substitutes (1) • increase in demand will increase price of Y's jeans (1). In terms of written explanation, reward but do not expect reference to positive cross elasticity of demand.
4. [8] (d) Up to 5 marks for why they might be: May have built up brand loyalty (1) their names and products may be well known (1) this may attract more customers (1). May have built up market power (1) may be a monopoly or moving towards a monopoly (1) may enable the firms to earn more profit (1). May have lower average cost of production (1) due to economies of scale (1) example (1). Up to 5 marks for why they may not be: May have become complacent/new firms may have more drive (1) not spending money on R & D and innovation/new firms may introduce new versions of the product (1). May have out of date capital equipment/new firms may have new capital equipment (1) low labour productivity/high labour productivity in new firms (1). May have higher average cost of production/new firms may have lower costs of production (1) due to diseconomies of scale experienced by old firms (1) example (1). New firms are likely to be small and so may be more flexible (1) have more/better contact with customers/give more personal attention (1) specialise in a particular part of the market (1). New firms may be subsidised (1) and so may enjoy lower costs of production (1).