Exam (elaborations)
AQA GCSE economics 15 marker exemplar response to the question "Why is price elasticity important to firms"
AQA GCSE economics 15 marker exemplar response to the question "Why is price elasticity important to firms"
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By: bashir_s • 1 year ago
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Why is price elasticity important to firms? (__ /15 marks)Price elasticity of demand measures the responsiveness of quantity demanded to changes in
price. Price elasticity of supply measures the responsiveness of quantity supplied to changes
in price.
Price elasticity of demand is important to firms as it enables them to measure at which price
their product/service sells the right quantity so that they can maximise revenue and profits.
This is dependent on the responsiveness of demand to changes in price and can be
displayed by the diagram below.
Price
Price elastic product A
Price inelastic product B
P £5
P1 £2
Pr ic e
Quantity Demanded
Q 10 Price
Q 20
Pr ic e
Q 60
Pr ic e
For product A, the demand curve displays a flatter gradient for Quantity demanded (QD)
according to the price, displaying the greater than proportional change in QD according to a
change in price. Two illustrative Price(P) and Quantity Demanded(QD) are written on the
graph. For a firm selling their price inelastic product they can use PED to understand that at
a price of £5 their product sales would be 10 and therefore their revenue would be £5x10 =
£50 whereas at £2 their revenue would be £2x20 = £40. This is demonstrative of how for
products with Price inelastic demand, firms are able to increase prices in order to increase
revenues as the decrease in QD will be offset by the greater than proportionate increase in
price.
On the other hand, firms selling Price elastic goods such as shown in the graph may chose to
increase quantity sellable than increase prices as this would lead to a dramatic decrease in
QD. Therefore, firms use PED to determine whether to prioritise price strategies or focus on
increasing sales. These firms may peruse greater marketing strategies or try to expand into
largely populated areas where increased quantity demanded can compensate for their
inability to raise prices for revenue growth. This increase in quantity demanded would cause
a shift in the demand curve to the right as demonstrated on the graph below.
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