4 Price Elasticity of Demand 1 2 4

4. Price Elasticity of Demand 1. 2. 4 PED

What do you see, what do you think?

Learning Outcomes By the end of the lesson you will be able to define Price Elasticity of Demand (PED) Calculate PED Interpret PED Explain the factors influencing PED Analyse the Impact and importance of PED to businesses Make a link between PED and total revenue

What is Price elasticity? • The responsiveness of DEMAND to a change in PRICE • When price rises what happens to demand? Demand falls BUT! How much does demand fall?

Elasticity – the concept If price rises by 10%, what happens to demand? We know demand will fall By more than 10%? or By less than 10%? Elasticity measures the extent to which demand will change

PED Formula % Change in Quantity Demanded % Change in Price

Remember this example? How do you work out % Changes?

% Change Look at the increase in quantity Demanded (4) Divide it by the original quantity (2) Multiply by 100 (4/2)x 100 = +200% Quantity Demanded INCREASED by 200%

Calculate % Change for Price Look at the decrease in price (-20) Divide it by the original quantity (100) Multiply by 100 (-20/100)x 100 = -20% Price DECREASED by 20%

Calculate PED % Change in Quantity Demanded +200% % Change in Price -20%

Consider a 10% increase in price Pe. D Mantra…. If answer is between 0 and 1 e. g. -0. 4 or -0. 8 The relationship is inelastic If the answer is between 1 and infinity e. g. -1. 4 or 2 or 12. 3 The relationship is elastic 11 Consumers DO NOT react much to a change in price Consumers DO react To changes in prices 09/03/2021

Use your whiteboards Elastic or inelastic? ? If price increases by 10% how much would quantity demanded fall by? Would customers react lots (ELASTIC) or not much (INELASTIC)…. . With the following PED’s? ? Try to notice details, you may be tested on them….

Elastic or inelastic? -3 Elastic – because a 10% increase in price would lead to a 30% fall in demand

Elastic or inelastic? -0. 4 Inelastic – because a 10% increase in price would lead to a 4% fall in demand

Elastic or inelastic? -0. 1 Inelastic – because a 10% increase in price would lead to a 1% fall in demand

Elastic or inelastic? -1. 1 Elastic – because a 10% increase in price would lead to a 11% fall in demand

Elastic or inelastic? -14 Elastic – because a 10% increase in price would lead to a 140% fall in demand

1. If Ped = 0 then demand is said to be perfectly inelastic. This means that demand does not change at all when the price changes – the demand curve will be vertical 2. If Ped is between 0 and 1 (i. e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. Producers know that the change in demand will be proportionately smaller than the percentage change in price 3. If Ped = 1 (i. e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level. 4. If Ped > 1, then demand responds more than proportionately to a change in price i. e. demand is elastic. For example a 20% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is – 1. 5

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Elasticity… continued! Can you remember: • The formula for PED? • An example of one good with an elastic PED? • An example of one good with an inelastic PED?

The PED Graph Again, generally speaking, we know that a flatter line shows us a more elastic curve, whilst a steeper line shows us a more inelastic curve.

Things that determine PED… So, demand is elastic or inelastic. But WHY? ! Three key reasons: Substitutes – if there are many substitutes, then consumers will react to a change in price by switching to a similar product. Elasticity for a good with many substitutes is therefore HIGH. Take a generic MP 3 player for example, there are many substitutes for this, so it is likely to have a higher elasticity than, for example salt, for which there are no strong substitutes. If one MP 3 company raised its price, people would simply buy a different player. If salt became more expensive, you, or your parents, would probably continue to buy salt.

Determinants of PED Width of Market Definition. Write down all of the substitutes for… Coca-Cola (different brands) Fizzy drinks (different types of drinks) Drinks (things you could have instead of a drink)

Time PED tends to be more elastic over a greater period of time. If the price of your favourite sweet jumped tomorrow, you might still buy it. In the long term, however, you are even more likely to abandon your favourite sweet for a cheaper option. Oil is our prime ‘textbook example’

What does this graph tell us? Think – 1 Minute Pair – 2 minutes

When demand is relatively elastic, if you increase price what happens to revenue?

What should Banana producers do to price to increase revenue?

What happens to revenue with a price increase?

When demand is highly inelastic AN increase in price will increase revenue This is because when price rises quantity demanded does not fall by much Firm with an inelastic demand, like in the fuel or tobacco market have an incentive to increase prices Consumers will continue to buy these products because they are a necessity and revenue should rise

When demand is highly inelastic AN increase in price will increase revenue This is because when price rises quantity demanded does not fall by much Firm with an inelastic demand, like in the fuel or tobacco market have an incentive to increase prices Consumers will continue to buy these products because they are a necessity and revenue should rise

When demand is highly inelastic AN increase in price will increase revenue This is because when price rises quantity demanded does not fall by much Firm with an inelastic demand, like in the fuel or tobacco market have an incentive to increase prices Consumers will continue to buy these products because they are a necessity and revenue should rise

June 2014 Ecbs

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Jan 2013 Edexcel Ecbs

Learning Outcomes Can you? define Price Elasticity of Demand (PED) Calculate PED Interpret PED Explain the factors influencing PED Analyse the Impact and importance of PED to businesses Make a link between PED, price and total revenue