2.5 Price Elasticity of demand Understand meaning of PED Understand graphs to illustrate Understand implications for revenue.

Page 20 Read page 20- 23 Price elasticity of demand - PED Quantity demanded – QD PED measures the effect the change in price will have on the quantity demanded of a product.

Example There is a financial expert who has been asked by a retailer that he wants to sell more. So by using economics we would lower the price. The question is though what does that lower price have on the amount of revenue. Does that prices change affect revenue and if so how?

PRICE X QUANTITY = REVENUE 90P X 105 = 94.5 Here we can see that the price change has indeed increased QD. However it has also dropped amount of revenue.

In order to work out PED of a good or service we use a formula: PED % Change in QD __________________ % Change in Price

Examples +20% / - 10% = -2 = elastic +5% / -10% = .5% = inelastic 10% / -10% = 1 = Unitary

LESSON 2

So why is PED important to a firm? Key term down page 22. Retailers need to know if their product is elastic or inelastic. Graphs Examples of Inelastic, Elastic and Unitary demand. However the main two to be aware of at present.

Perfectly Inelastic demand THE QD demanded remains the same although the price changes. Demand is completely unresponsive to change in price. EG Oxygen.

Perfectly Elastic demand Here any change in price and demand collapses.

PED shows how responsive QD is to a change in price. Perfectly elastic demand = load of substitutes. Any change in price and demand collapses. Perfectly inelastic demand = Quantity remains the same. EG oxygen. Retailers need to know if their product is elastic or inelastic. Petrol/beer/tobacco - all inelastic products so that’s why the government taxes them.

Factors that influence PED SHIT L Substitutes Habit- Forming Income Time period Luxury and Necessities