1. ELASTICITY

2. Price Elasticity of Demand

3. Elasticity: a measure of the sensitivity of one variable to changes in another variable. Elasticity = % change in dependent variable % change in independent variable

4. Go to kahoot.it
Elasticity Quiz

5. Types of Elasticity Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Price elasticity of supply

6. Price Elasticity of Demand
Dependent variable = quantity demanded Independent variable = price Price elasticity of demand: measures the percentage change in demand for a product following a change in its price. Ped = % change in quantity demanded % change in price PED = %  Q %  P

7. You have to Q up...
_________________
To P down…

8. C
PED = ____0___Q_ P

9. 5 possible values for PED…
1. If % ∆ Q > % ∆ P
ratio will be GREATER THAN 1
product is ELASTIC
E.g. a 20% rise in the price tomatoes (R1 - R1.20) leads to a larger fall in quantity demanded from 150 units to 100 (50%)
Calculate the PED…

10. 2. If % ∆ Q < % ∆ P
ratio will be LESS THAN 1
product is INELASTIC
E.g. a 50% rise in price from R10 to R15 leads to a smaller fall in sales (demand) form 100 units to 80 (20%).
Calculate the PED…

11. 3. If % ∆ Q = % ∆ P
ratio will be EQUAL TO 1
product is UNIT ELASTIC
E.g. price increases by 50%, demand decreases by 50%.
Calculate the PED…

12. 4. If PED = 0
Change in price has no effect
Perfectly Inelastic
Demand curve will be ___________

13. 5. If PED = ∞
Rise in price will cause demand to fall to 0
Perfectly Elastic
Demand curve will be ___________

14. Perfectly inelastic = 0 Inelastic = from 0 - < 1
SUMMARY
Perfectly inelastic = 0
Inelastic = from 0 - < 1
Unitary elastic = 1
Elastic = >1
Perfectly elastic = ∞

15. What Determines Price Elasticity of Demand?
Number of close substitutes

16. 2. Uniqueness of the product
My hockey shirt vs. my brother’s hockey shirt!
3. Degree of complementarity of a good/service
Complementary goods tend to have a low PED
IPhones ITunes
Games consoles Games
Golf clubs Golf balls
Cars Car parts

17. 4. The cost of switching between different products 24 month contracts

18. 5. Luxury or necessity

19. 6. The time period allowed following a price change Petrol price increase very inelastic in ST LT – people switch to fuel efficient/electric cars – demand becomes more elastic. Impulse buys very inelastic

20. 7.  The % of a consumer’s income allocated to spending on the good

21. 8.  Habit forming goods

22. 9. Peak and off-peak demand
Cell phones call charges
Rail/airfares (school holidays)
Internet charges

23. 10. Advertising and brand loyalty

24. Price elasticity of demand and total revenue for a producer

25. What happens to total revenue?
Change in the market
What happens to total revenue?
Ped is inelastic and a firm raises its price.
Total revenue ________
Ped is elastic and a firm lowers its price.
Ped is elastic and a firm raises its price.
Ped is 1.5 and the firm raises its price by 4%
Ped is 0.4 and the firm raises its price by 30%
Ped is 0.2 and the firm lowers its price by 20%
Ped is 4.0 and the firm lowers its price by 15%

27. Changing elasticities along a demand curve