Factors which determine the value of PED (OCR A-Level Economics): Model Answers

Introduction

• Define PED and explain its importance in economics. PED measures the responsiveness of quantity demanded to a change in price.
• Introduce the key factors influencing PED: availability of substitutes, necessity vs. luxury, proportion of income spent, and time period.
• Clearly outline the essay structure and indicate that you will evaluate each factor in detail.

Section	Content	Analysis	Evaluation
Availability of Substitutes	Discuss how the presence of close substitutes makes demand more elastic. If there are many alternatives, consumers can easily switch if the price changes.	Substitutes increase PED because consumers can easily find alternatives if the price rises, reducing quantity demanded significantly.	Consider cases where substitutes might not be perfect or where they are not readily available, thus affecting the PED.
Necessity vs. Luxury	Explain that necessities typically have inelastic demand because consumers need them regardless of price changes, whereas luxuries are more elastic.	Necessities (e.g., insulin) have fewer substitutes and are crucial, so demand does not drop much with price increases. Luxuries (e.g., yachts) are more sensitive to price changes.	Evaluate how the definition of necessity and luxury can vary, and how this variation affects the PED in different markets.
Proportion of Income Spent	Analyse how the proportion of income spent on a good affects PED. Goods that consume a larger portion of income tend to have more elastic demand.	If a good constitutes a large portion of consumer income, a price increase will significantly affect consumer purchasing power, making demand more elastic.	Consider exceptions where high-income consumers might not be as affected by price changes, thus exhibiting inelastic demand despite high expenditure.
Time Period	Discuss how demand elasticity can change over time. In the short run, demand might be more inelastic, but over the long run, consumers may find substitutes or adjust their consumption.	In the short term, consumers may not have immediate alternatives, leading to inelastic demand. Over time, as alternatives become available or adjustments are made, demand becomes more elastic.	Evaluate how the time period influences PED differently in various markets and for different goods. For example, oil might have a different PED in the short and long term.

Conclusion

• Summarise the main factors affecting PED and their relative importance. Highlight that the value of PED depends on a combination of these factors and their interplay.
• Reinforce that while all factors are important, their impact can vary depending on the context and nature of the good or service.

Reflect on how understanding PED helps businesses and policymakers make informed decisions, and discuss any limitations or generalisations that might apply.

Top 3 Tips for Getting 40/40 in Your Essay

Tip Number	Tip
1	Integrate Real-World Examples:- Use specific, real-world examples to illustrate each factor's impact on Price Elasticity of Demand (PED). - For example, cite luxury cars for elasticity and essential medicines for inelasticity. - This demonstrates a deeper understanding and application of theoretical concepts to practical situations.
2	Balanced Evaluation:- Evaluate each factor with an emphasis on both strengths and limitations. - Discuss how factors influence PED and consider situations where these factors might not apply as expected. - This balanced approach shows critical thinking and a nuanced understanding.
3	Clear Structure and Argumentation:- Maintain a clear and logical structure throughout the essay. - Use subheadings for each factor and ensure each section follows a consistent pattern: explanation, analysis, and evaluation. - This clarity helps in making your argument compelling and easy to follow, increasing the likelihood of achieving a perfect score.