Seminar

Learning Objectives After this seminar, you should be able to: Define price elasticity of demand. List the determinants of the price elasticity of demand Use price elasticity of demand to predict changes in equilibrium prices and quantities.

But first !  We want to know what you already know or think you know about elasticity.  In groups discuss: How responsive is consumer demand to changes in prices?

Price Elasticity of Demand Defining price elasticity of demand (P  D )  responsiveness of demand to a change in price

Quantity Price O Q1Q1 P1P1 a S1S1 D Market supply and demand

Quantity Price O Q2Q2 Q1Q1 P1P1 P2P2 b S2S2 S1S1 D a The effect on price of a shift in supply depends on the responsiveness of demand to a change in price. Market supply and demand

Quantity Price O Q2Q2 Q1Q1 P1P1 P2P2 S2S2 S1S1 D D'D' a b The effect on price of a shift in supply depends on the responsiveness of demand to a change in price. Market supply and demand

Quantity Price O Q3Q3 Q2Q2 Q1Q1 P1P1 P2P2 P3P3 c S2S2 S1S1 D D'D' a b The effect on price of a shift in supply depends on the responsiveness of demand to a change in price. Market supply and demand

Price Elasticity of Demand Measuring price elasticity of demand %  Q D / %  P  use of percentage changes  the sign: positive or negative?  the value: greater or less than 1?

P (£) Q (000s) Demand Measuring elasticity using the arc method m n

P (£) Q (000s)  Q  P mid Q mid P  P  d = Demand m n  Q = 10  P = –2 Mid P 7 Mid Q 15 Measuring elasticity using the arc method

P (£) Q (000s)  Q  P mid Q mid P  P  d = 10   = Demand m n  Q = 10  P = –2 Mid P 7 Mid Q 15 Measuring elasticity using the arc method

P (£) Q (000s)  Q  P mid Q mid P  P  d = 10   = = 10/15 x  7/2 Demand m n  Q = 10  P = –2 Mid P 7 Mid Q 15 Measuring elasticity using the arc method

P (£) Q (000s)  Q  P mid Q mid P  P  d = 10   = = 10/15 x  7/2 =  70/30 Demand m n  Q = 10  P = –2 Mid P 7 Mid Q 15 Measuring elasticity using the arc method

P (£) Q (000s)  Q  P mid Q mid P  P  d = 10   = = 10/15 x  7/2 =  70/30 =  7/3 =  2.33 Demand m n  Q = 10  P = –2 Mid P 7 Mid Q 15 Measuring elasticity using the arc method

Q If the price of good X rises from £9 to £11 and as a result quantity demanded falls from 100 units to 60 units, what is the price elasticity of demand between these prices? A. 2/–80 = –0.025 B. –80/2 = –40 C. 0.2/–0.5 = –0.4 D. –0.5/0.2 = –2.5 E. –1

Price Elasticity of Demand Determinants of price elasticity of demand  number and closeness of substitute goods  proportion of income spent on the good  the time period

Q The price elasticity of demand for holidays in Greece is likely to be high because: A. people tend to book up a long time in advance. B. there are plenty of different holidays abroad to choose from. C. expenditure on holidays account for a relatively small part of people’s total income. D. holidays at home provide no real alternative. E. people need a holiday if they are to cope with the year ahead – and they prefer holidays abroad.

Special cases  P  D = 0 Price Elasticity of Demand Special cases

P2P2 P Q O Q1Q1 P1P1 D b a Totally inelastic demand (P  D = 0)

Special cases  P  D = 0  P  D = –  Price Elasticity of Demand and Consumer Expenditure

Q2Q2 P Q O Q1Q1 P1P1 D a b Infinitely elastic demand (P  D =  )

Special cases  P  D = 0  P  D = –   P  D = –1 Price Elasticity of Demand and Consumer Expenditure

P Q O D a Unit elastic demand (P  D = –1) b Expenditure stays the same as price changes

Recap Price elasticity of demand is a measure of responsiveness of demand to a change in price. It is defined as the proportional (or percentage) change in quantity demanded divided by the proportional ( or percentage) change in price. Given that demand curve are downward sloping, price elasticity of demand will have a negative value. If quantity changes proportionally more than price. The figure for elasticity will be greater than 1( ignoring the sign): demand is elastic. If quantity changes proportionally less than price, the figure for elasticity will be less than 1( again, ignoring the sign): demand is in. if quantity and price change by the same proportion, the elasticity has a value of (minus) 1: demand is unit elastic. Demand will be more elastic the greater the number of closeness of substitutes goods, the higher the proportion of income spent on the good and the longer the time period that elapses after the change ion price.

What have I learnt? Go to and use the code

KEY TERMS Elastic demand Inelastic demand Perfectly elastic demand Perfectly inelastic demand (E d ) Price elasticity of demand Unit elastic demand