PRICE ELASTICITY OF DEMAND WHAT IS PRICE ELASTICITY

PRICE ELASTICITY OF DEMAND

WHAT IS PRICE ELASTICITY OF DEMAND? Price Elasticity measures how responsive demand is to changes in price.

HOW DOES PRICE IMPACT MARS SALES? Demand for Mars bars ₤. 50 At ₤. 30 the shop sells 300 mars bars per week. Price ₤. 40 Dropping the price to ₤. 20 the shop sells ______ mars bars per week. ₤. 30 ₤. 20 ₤. 10 100 200 300 400 500 600 Quantity Demanded (per week) 700 800

An Elastic Demand Curve EXPLAIN THE CHANGE IN PRICE AND QUANTITY. . PRICE DROPS FROM $300 TO _____ DEMAND INCREASES FROM _____ TO ______ ₤ 500 Price ₤ 400 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

Extension Effects on revenue: ₤ 500 ₤ 300 x 300 = ₤ 90, 000 Price ₤ 400 ₤ 200 x 620 = ₤ 125, 000 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

An Elastic Demand Curve ₤ 500 A small increase in price by ₤ 50 results in a sharp fall in quantity demanded. ₤ 400 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

Calculating % Change $300 to $350 in % is CHANGE / ORIGINAL X 100 ₤ 500 ₤ 400 50/ 300 = 16. 6% + ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

Calculating % Change QD changes 300 to 150 CHANGE / ORIGINAL X 100 ₤ 500 ₤ 400 150/ 300 = 50% - ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

Calculating Elasticity of Demand • Price increased by 16. 6% • Quantity demand fell by – 50%

ELASTIC DEMAND CURE Demand is Elastic when a percentage change in price results in a proportionally LARGER percentage change in quantity demanded. Handout Page 2

An Inelastic Demand Curve ₤ 500 Dropping the price $300 to ₤ 200 the demand increases only $ 300 to 340. Price ₤ 400 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

CALCULATE % CHANGES • Dropping the price $300 to ₤ 200 • the demand increases only $300 to 340. • Remember % = Change / Original X 100.

An Inelastic Demand Curve ₤ 500 An increase in price by ₤ 50 results in a very small decrease in the quantity demanded. Price ₤ 400 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

INELASTIC DEMAND CURE Inelastic demand is when a percentage change in price results in a proportionally smaller percentage change in quantity demanded. Handout Page 3

Price Extension ₤ 500 Effects on revenue: ₤ 400 ₤ 300 x 300 = ₤ 90, 000 ₤ 300 ₤ 200 x 340 = ₤ 68, 000 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

DISCUSSION, WHICH OF THE FOLLOWING ARE PRICE ELASTIC OR PRICE INELASTIC?

HOW TO CALCULATE PRICE ELASTICITY OF DEMAND Price Elasticity of Demand = Percentage change quantity demanded Percentage change in Price Percentage change quantity demanded divided by Percentage change in price Handout Page 6

Calculate the; a) % change in Price b) % change in QD c) Price elasticity of demand d) Is product Elastic or Inelastic? ₤ 500 Price ₤ 400 ₤ 300 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800

The percentage change in price The price has changed from ₤ 300 to ₤ 200 change = ₤ 100 The percentage change in demand 340 ÷ 300 x 100 = 113. 33% -₤ 100 ÷ ₤ 300 x 100 = 33. 33% ₤ 500 Price ₤ 400 ₤ 300 Demand has changed from 300 to 640 change = 340 ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800 Handout Page 7

CALCULATING THE PRICE ELASTICITY OF DEMAND Price Elasticity of Demand Price Elasticity = -3. 4 = Percentage (%) change quantity demanded Percentage (%) change in Price The percentage change in demand = 113. 33% The percentage change in price = -33. 33% Handout Page 4

Price Elasticity = -3. 4 Demand for a product usually rises when the price falls, the relation between then is inverse this is why we get a negative figure. This minus sign is sometimes ignored. The number 3. 4 shows the degree of elasticity – This is greater than 1 which means demand is Elastic.

PRICE ELASTICITY OF DEMAND • ANSWER IS ALWAYS – • Answer greater than 1 is elastic. (-2. 4) • Answer less than 1 is inelastic. (-0. 3)

PRICE ELASTICITY VALUES � Price elastic = more than 1 � � the % change in price will lead to a Larger % change in quantity demanded. Price inelastic = less than 1 � the % change in price will lead to a Smaller % change in quantity demanded. Handout Page 7

FAB TUCK CO � Fab Tuck sells confectionary. � Last week, they set the high price of 30 p for Mars bars and sold 20. � This week, they decided to reduce the price to 27 p and sells 30. Work out whether Mars is price elastic and inelastic

FIRST YOU NEED TO WORK OUT THE PERCENTAGE CHANGE. Week 1 Week 2 Quantity 20 30 Price 30 p 27 p Percentage = Change Original x Percentage change 100

Quantity Price Week 1 20 Week 2 30 Percentage change 30 p 27 p -10% Elasticity = 50% -10% 50% -5

Price elasticity and company revenue A company selling specialist drill bits increases the price from ₤ 20 to ₤ 40. Quantity Demanded ₤ 50 Price ₤ 40 ₤ 30 What is the weekly revenue the company is receiving at the original price? __________ What is the weekly revenue the company is receiving at the new price? __________ Highlight the area of the graph that represents the gain in revenue. Highlight the area of the graph that represents the loss in revenue. ₤ 20 ₤ 10 100 200 300 400 500 600 Quantity Demanded per week 700 800

A retail store selling “Kit. Kats” increases the price from twenty pence to thirty pence. Below is the demand curve. What is the weekly revenue the company is receiving at the original price? __________ What is the weekly revenue the company is receiving at the new price? __________ ₤. 50 Highlight the area of the graph that represents the gain in revenue. Highlight the area of the graph that represents the loss in revenue. Price ₤. 40 Quantity Demanded ₤. 30 ₤. 20 ₤. 10 100 200 300 400 500 600 Quantity Demanded per week 700 800 Handout Page 4

A demand curve is Inelastic when____________________________________________________

Price elasticity = To calculate a percentage change in demand:

The percentage change in price -₤ 100 ÷ ₤ 300 x 100 = _______ The price has changed from ₤ 300 to ₤ 200 change = _____ The percentage change in demand 340 ÷ 300 x 100 = _____ ₤ 500 Price ₤ 400 ₤ 300 Demand has changed from 300 to 640 change =______ ₤ 200 ₤ 100 200 300 400 500 Quantity Demanded 600 700 800