1. CW Price Elasticity of Demand Date: 24.09.2014 To what extent does a change in price affect quantity demand? Understand the concept of price elasticity Understand how to find the elasticity of markets and different goods Be able to discuss the business revenue of different elasticity estimates Learning objective: l

2. Price Elasticity of Demand

3. GRAPHED EXPAINATION

4. Price Elasticity of Demand FACTORS THAT INFLUENCE THE VALUE OF PED Number of Close substitutes: Substitution effect Luxuries and necessities: Necessities = inelastic, Luxuries = elastic Percentage of income spent on good Habit forming goods; e.g. cigarettes and drugs = inelastic Time period: elastic in long run, more inelastic in short run

5. Price Elasticity of Demand USES FOR PED Total revenue and profit: Price inelastic = rise in price = rise in spending on the good Calculating changes in demand Business planning: production levels, employment, affect on stocks Price discrimination: e.g. phone companies and different rates during the day

6. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Following their promotion to the Premier League, the cheapest season ticket at Burnley F.C. has increased from £329 to £499. How would you expect this to affect sales of season tickets? Burnley F.C. sold 15000 season tickets for 2013/14 season. Following their promotion to the Premier League, the cheapest season ticket at Burnley F.C. has increased from £329 to £499. How would you expect this to affect sales of season tickets? Burnley F.C. sold 15000 season tickets for 2013/14 season.

7. Price Elasticity of Demand To what extent does a change in price affect quantity demand?

8. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Answer of less than -1 e.g. -1.1 or more = price elastic demand (relatively responsive to changes in price) Answer of more than -1 e.g. -0.5 = price inelastic demand (relatively unresponsive to changes in price) Answer of -1 = price unitary demand (any change in price/income is exactly matched by a change in quantity demanded) The price elasticity of demand for Burnley F.C. season tickets (-0.59) is … Inelastic

9. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Why is the demand for Burnley F.C. season tickets price inelastic, or relatively unresponsive to changes in price? What kinds of goods and services would be, similarly or more, price inelastic? What kinds of goods would be price elastic, or relatively responsive, to changes in price? Why is the demand for Burnley F.C. season tickets price inelastic, or relatively unresponsive to changes in price? What kinds of goods and services would be, similarly or more, price inelastic? What kinds of goods would be price elastic, or relatively responsive, to changes in price?

10. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Determinants of Price Elasticity The extent to which you can substitute consumption of the good for consumption of another good. A good which is a necessity will have price inelastic demand for example. % of income spent on the good. If a large part of your income is spent on the good it will have price elastic demand because even a small % increase in price will have a large effect on your income. As the price of a good increases, price elasticity will increase. Consumers will find substitute goods more attractive (the opportunity cost of not switching to a substitute increases). Time; that is, if you have more time to make your purchase you have more time to find substitutes. Determinants of Price Elasticity The extent to which you can substitute consumption of the good for consumption of another good. A good which is a necessity will have price inelastic demand for example. % of income spent on the good. If a large part of your income is spent on the good it will have price elastic demand because even a small % increase in price will have a large effect on your income. As the price of a good increases, price elasticity will increase. Consumers will find substitute goods more attractive (the opportunity cost of not switching to a substitute increases). Time; that is, if you have more time to make your purchase you have more time to find substitutes.

11. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Calculate the price elasticity of demand when … Price change = 40% QD change = -20% Price change = -12.5% QD change = 25% Price change = 100% QD change =- 33% Price change =- 20% QD change = 33% Price change = 33% QD change = 0 Price change = -92% QD change = 25% Is the price elasticity of demand elastic or inelastic? Calculate the price elasticity of demand when … Price change = 40% QD change = -20% Price change = -12.5% QD change = 25% Price change = 100% QD change =- 33% Price change =- 20% QD change = 33% Price change = 33% QD change = 0 Price change = -92% QD change = 25% Is the price elasticity of demand elastic or inelastic?

12. Price Elasticity of Demand To what extent does a change in price affect quantity demand? Knowledge of the price elasticity of demand for their season tickets is useful for Mike Garlick and John Banaszkiewicz, the owners of Burnley F.C.? If a business has information about price elasticity it can use it to predict what will happen to revenue and profit if price changes: Price inelastic – price increase will increase revenue and profit Price elastic – price increase will decrease revenue and profit If a business has information about price elasticity it can use it to predict what will happen to revenue and profit if price changes: Price inelastic – price increase will increase revenue and profit Price elastic – price increase will decrease revenue and profit http://www.theguardian.com/football/blog/2013 /jan/13/premier-league-prices-attendances

13. Elasticity -the responsiveness of quantity demanded to changes in other variables e.g. price and incomes. COMPLEMENT – PRODUCTS WHICH ARE USED TOGETHER  Price Elasticity of Demand – the responsiveness of quantity demanded to changes in price.  Elastic demand – when quantity demanded is relatively responsive to changes in other variables.  Inelastic demand – when quantity demanded is relatively unresponsive to changes in other variables. Substitute – products which could be used for the same purpose.

14. CW Cross Elasticity of Demand To what extent does a change in the price of one good affect quantity demanded of other goods? Upon its launch, it was rumoured that Amazon were selling their Kindle Fire tablet at cost. Why would they do this? l Jeff Bezos at the launch of the Kindle Fire Tablet.

15. Cross elasticity of demand To what extent does a change in the price of one good affect quantity demanded of other goods? It has been the policy of successive Governments to maintain a high level of tax on tobacco products in order to reduce tobacco consumption and the prevalence of smoking. Between 1993 and 2000 a tobacco duty ‘escalator’, which saw year-on-year increases in tobacco duty ahead of inflation, was implemented with the aim of reducing consumption still further. http://www.the- tma.org.uk/policy- legislation/taxation/ It has been the policy of successive Governments to maintain a high level of tax on tobacco products in order to reduce tobacco consumption and the prevalence of smoking. Between 1993 and 2000 a tobacco duty ‘escalator’, which saw year-on-year increases in tobacco duty ahead of inflation, was implemented with the aim of reducing consumption still further. http://www.the- tma.org.uk/policy- legislation/taxation/ As part of the 2014 budget, the tax on cigarettes was increased by 28p. A packet of 20 King Sized Benson and Hedges Gold now costs approximately £8.80. How would you expect this price increase to affect the demand for smoking cessation products like Nicotine gum and patches? Would demand increase or is there no link between the two? As part of the 2014 budget, the tax on cigarettes was increased by 28p. A packet of 20 King Sized Benson and Hedges Gold now costs approximately £8.80. How would you expect this price increase to affect the demand for smoking cessation products like Nicotine gum and patches? Would demand increase or is there no link between the two?

16. Cross Elasticity of Demand To what extent does a change in income affect quantity demand? YearPrice of cigarettes (£) Sales of packets of nicotine patches (000s) 20138.50100 20148.80115 Using the information in the table, calculate the cross elasticity of demand for cigarettes and nicotine patches. What does your answer tell you?

17. Cross Elasticity of Demand To what extent does a change in the price of one good affect quantity demanded of other goods? Substitutes – have a positive cross elasticity (the change in the price of good B causes a similar change in the quantity demanded of good a e.g. B goes up, A goes up). The bigger the number, the closer they are substitutes. Complements – have a negative cross elasticity (the change in the price of good B causes an opposite change in quantity demanded of A). The smaller the number, the more the goods complement one another.

18. Cross Elasticity of Demand To what extent does a change in the price of one good affect quantity demanded of other goods? Calculate the cross elasticity of demand when … Change in price of good x = 35% QD change of good y = 25% Price change = 15% QD change = 25% Price change = 40% QD change = -20 % Price change = -18% QD change = -10% Price change = -40% QD change = 22% Is the good a substitute or complement?

19. Price elasticity of supply The responsiveness of quantity supplied to changes in price is determined by: 1. Time – a firm needs time to increase production in response to change in price (production lag) 2. Spare capacity – is the firm able to increase production because it has spare capacity e.g. labour not working at full capacity, machinery could be used for longer. 3. Available raw materials (level of stocks) 4. Substitutability of factors of production: can the factors be easily moved in and/or out (Can other resources by substituted to the production of this good?)

20. Business relevance Businesses can use price elasticity of supply to predict how a supplier will respond to a change in the price of the product that they produce.