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. INFERIOR GOOD: a good which if income were to increase, there would be a decrease in demand

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

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?

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.

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.

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. 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. 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?

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) Using the information in the table, calculate the cross elasticity of demand for cigarettes and nicotine patches. What does your answer tell you?

Cross Elasticity of Demand To what extent does a change in the price of one good affect quantity demanded of other goods? A measure of how much the quantity demanded of one good responds to a change in price of the other good. 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.

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 … 1. Change in price of good x = 35% QD change of good y = 25% 2. Price change = 15% QD change = 25% 3. Price change = 40% QD change = -20 % 4. Price change = -18% QD change = -10% 5. Price change = -40% QD change = 22% a) Is the cross price elasticity positive (P of Good 1, Q of Good 2 move in same direction i.e. both increase) or negative ( P of Good 1, Q of good 2 move in different directions i.e. One increases the other decreases) ? b) Is the good a substitute or complement?

CW ELASTICITY: Supply and Income Date: To what extent does a change in price affect quantity supplied? Understand how to find the elasticity of markets and different goods Apply a knowledge of cross elasticity and price elasticity of supply Be able to discuss the business revenue of different elasticity estimates 30 Learning objective: l Considering the info provided, write in your own definitions of Luxury good, normal good, necessity, and inferior good

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?) 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.

Calculating Price Elasticity of Supply To what extent does a change in income affect quantity demand? YearAverage price of biscuits (£ per kg) Using the information available, how would you expect the output of biscuit manufacturers to respond to the change in the price of biscuits? Price elasticity of supply for biscuits is 1.6.

To what extent does a change in the price of a good affect the quantity supplied? How would you expect the recent increase in the price of cocoa to affect its supply? l

INCOME ELASTICITY OF DEMAND % CHANGE IN QD % CHANGE IN INCOME  Measures the responsive of a change in income. The + or – sign is important as it makes an increase or decrease in the QD =

 Normal goods = +IED - real disposable income increases and demand for product also increases  Income elastic go0ods = estimate of IED > 1 (relatively responsive to change in income)  Income inelastic goods = estimate of IED <1 (relatively unresponsive to change in income)  NEGATIVE MOVEMENT: denotes an inferior good. As income increases demand for this good decreases.  POSITIVE MOVEMENT: Superior goods, demand increases considerably more in relation to income increase – e.g.s are dependent on beginning income