PRICE ELASTICITY OF DEMAND

WHAT IS PRICE ELASTICITY OF DEMAND? Price Elasticity measures how responsive demand is to changes in price.

Quantity Demanded (per week) ₤.10 ₤.20 ₤.30 ₤.40 ₤.50 Price Demand for Mars bars At ₤.30 the shop sells 300 mars bars per week. Dropping the price to ₤.20 the shop sells ______ mars bars per week. HOW DOES PRICE IMPACT MARS SALES?

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Price An Elastic Demand Curve EXPLAIN THE CHANGE IN PRICE AND QUANTITY.. PRICE DROPS FROM $300 TO _____ DEMAND INCREASES FROM _________ TO ____________

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Price Effects on revenue: ₤300 x 300 = ₤ 90,000₤200 x 620 = ₤ 125,000 Extension

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 An Elastic Demand Curve A small increase in price by ₤50 results in a sharp fall in quantity demanded.

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Calculating % Change $300 to $350 in % is CHANGE / ORIGINAL X / 300 = 16.6% +

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Calculating % Change QD changes 300 to 150 CHANGE / ORIGINAL X / 300 = 50% -

Price increased by 16.6% Quantity demand fell by – 50% Calculating Elasticity of Demand

ELASTIC DEMAND CURE Demand is Elastic when a percentage change in price results in a proportionally LARGER percentage change in quantity demanded. Handout Page 2

Quantity Demanded ₤100 ₤2 00 ₤30 0 ₤400 ₤500 Price An Inelastic Demand Curve Dropping the price $300 to ₤200 the demand increases only $ 300 to 340.

CALCULATE % CHANGES Dropping the price $300 to ₤200 the demand increases only $300 to 340. Remember % = Change / Original X 100.

Quantity Demanded ₤100 ₤2 00 ₤30 0 ₤400 ₤500 Price An Inelastic Demand Curve An increase in price by ₤50 results in a very small decrease in the quantity demanded.

Inelastic demand is when a percentage change in price results in a proportionally smaller percentage change in quantity demanded. INELASTIC DEMAND CURE Handout Page 3

Quantity Demanded ₤100 ₤2 00 ₤30 0 ₤400 ₤500 Price Extension Effects on revenue: ₤300 x 300 = ₤ 90,000₤200 x 340 = ₤ 68,000

DISCUSSION, WHICH OF THE FOLLOWING ARE PRICE ELASTIC OR PRICE INELASTIC?

Percentage change quantity demanded Percentage change in Price = Price Elasticity of Demand Percentage change quantity demanded divided by Percentage change in price HOW TO CALCULATE PRICE ELASTICITY OF DEMAND Handout Page 6

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Price Calculate the; a)% change in Price b)% change in QD c)Price elasticity of demand d)Is product Elastic or Inelastic?

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Price The price has changed from ₤300 to ₤200 change = ₤100 The percentage change in price -₤100 ÷ ₤300 x 100 = 33.33% Demand has changed from 300 to 640 change = 340 The percentage change in demand 340 ÷ 300 x 100 = % Handout Page 7

Percentage (%) change quantity demanded Percentage (%) change in Price = Price Elasticity of Demand The percentage change in demand = % The percentage change in price = % Price Elasticity = -3.4 CALCULATING THE PRICE ELASTICITY OF DEMAND Handout Page 4

Price Elasticity = -3.4 Demand for a product usually rises when the price falls, the relation between then is inverse this is why we get a negative figure. This minus sign is sometimes ignored. The number 3.4 shows the degree of elasticity – This is greater than 1 which means demand is Elastic.

PRICE ELASTICITY OF DEMAND ANSWER IS ALWAYS – Answer greater than 1 is elastic. (-2.4) Answer less than 1 is inelastic. (-0.3)

PRICE ELASTICITY VALUES  Price elastic = more than 1  the % change in price will lead to a Larger % change in quantity demanded.  Price inelastic = less than 1  the % change in price will lead to a Smaller % change in quantity demanded. Handout Page 7

 Fab Tuck sells confectionary.  Last week, they set the high price of 30p for Mars bars and sold 20.  This week, they decided to reduce the price to 27p and sells 30. Work out whether Mars is price elastic and inelastic FAB TUCK CO

FIRST YOU NEED TO WORK OUT THE PERCENTAGE CHANGE. Week 1 Week 2 Percentage change p27p Percentage = Change x 100 Original Price Quantit y

Week 1 Week 2 Percentage change % 30p27p-10% Quantity Price Elasticity = 50% % Elasticity = 50% %

Quantity Demanded per week Quantity Demande d A company selling specialist drill bits increases the price from ₤20 to ₤40. What is the weekly revenue the company is receiving at the original price? ___________________ What is the weekly revenue the company is receiving at the new price? ___________________ Highlight the area of the graph that represents the gain in revenue. Highlight the area of the graph that represents the loss in revenue. A company selling specialist drill bits increases the price from ₤20 to ₤40. What is the weekly revenue the company is receiving at the original price? ___________________ What is the weekly revenue the company is receiving at the new price? ___________________ Highlight the area of the graph that represents the gain in revenue. Highlight the area of the graph that represents the loss in revenue. ₤10 ₤20 ₤30 ₤40 ₤50 Price Price elasticity and company revenue

Quantity Demanded per week Quantity Demande d ₤.10 ₤.20 ₤.30 ₤.40 ₤.50 Price A retail store selling “KitKats” increases the price from twenty pence to thirty pence. Below is the demand curve. What is the weekly revenue the company is receiving at the original price? ___________________ What is the weekly revenue the company is receiving at the new price? ___________________ Highlight the area of the graph that represents the gain i n revenue. Highlight the area of the graph that represents the loss in revenue. A retail store selling “KitKats” increases the price from twenty pence to thirty pence. Below is the demand curve. What is the weekly revenue the company is receiving at the original price? ___________________ What is the weekly revenue the company is receiving at the new price? ___________________ Highlight the area of the graph that represents the gain i n revenue. Highlight the area of the graph that represents the loss in revenue. Handout Page 4

A demand curve is Inelastic when__________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ _

Price elasticity = To calculate a percentage change in demand:

Quantity Demanded ₤100 ₤200 ₤300 ₤400 ₤500 Price The price has changed from ₤300 to ₤200 change = _____ The percentage change in price -₤100 ÷ ₤300 x 100 = _______ Demand has changed from 300 to 640 change =______ The percentage change in demand 340 ÷ 300 x 100 = _____