1. Quick Quiz 27th Sept 2011 Define demand (1 mark)
Illustrate the impact on demand when there is a rise in price (4 marks)
Explain 2 factors that will increase demand (4 marks)

2. Elasticity of Demand

3. Objectives
To understand and be able to calculate price, income and cross elasticity of demand
Be able to evaluate the business relevance of these elasticity estimates

4. Price Elasticity of Demand (PED)
Measures the responsiveness of demand for a product to a change in its price
When demand is very responsive to changes in price it is said to be ‘price elastic’
When demand is not very responsive to changes in price it is said to be ‘price inelastic’

5. Calculating PED
% ∆ QD
% ∆ P
PED =

6. Remember
The %Δ QD is found by dividing the change in QD by the original QD
Δ QD X 100
Original QD
And Δ P is found by dividing the change in P by the original P
%Δ QD =

7. Example
The price of a product rises from £20 to £24 and demand falls from 400 to 300
The PED will be -25%/20% = -1.25
Note PED is generally negative so for ease of comparing elasticities, economists tend to ignore the minus sign when interpreting figure

8. Description of Response Perfectly Inelastic
Value
Description of Response
Perfectly Inelastic
PED= 0
A change in price will have no effect on QD
Inelastic
0<PED<1
The %Δ in QD is less than the %Δ in P (i.e. demand is not very responsive to changes in P)
Unitary
PED=1
The %Δ in QD equals the %Δ in price
Elastic
PED>1
The %Δ in QD is more than the %Δ in P (i.e. demand is very responsive to changes in P)
Perfectly Elastic
PED= ∞
A change in price will cause an infinite change in the QD

9. Diagrams
Perfectly Inelastic Demand- ‘for a given change in price there will be no change in quantity demanded’
Perfectly Elastic Demand- ‘for a given change in price there will be an infinite change in quantity demanded’
 Inelastic Demand- ‘for a given change in price there will be a proportionately smaller change in quantity demanded’
Elastic Demand- ‘for a given change in price there will be a proportionately greater change in quantity demanded’

10. P D P D Q Q
Perfectly Elastic
Perfectly Inelastic

11. Different products are likely to have different elasticities of demand
Different products are likely to have different elasticities of demand. The elasticity will depend on a number of factors (to follow) D
Price D
Quantity
Quantity
Inelastic demand
Elastic demand

12. Unit PED
If price is raised by a certain percentage then the quantity demanded will fall by the same percentage
Eg. A 10% increase in price will lead to a 10% fall in demand
Revenue does not change as the price changes

13. A curve with unitary elasticity is a rectangular hyperbola with the formula PQ=k (k is a constant value) D P Q

14. The 10% Rule Always use the 10% rule when explaining elasticities
Eg. What does a PED of indicate?
Demand is elastic. A change in the price will lead to a proportionately larger change in quantity demanded. I.e. for a 10% rise in price, there will be a 19% fall in quantity demanded.
Calculation: QD/10%= -1.9
So 10%x -1.9= QD= -19%

15. What about these ones?
PED= -0.7
PED= -1.3
PED=-2
PED=-1

16. Short Activity on PED

17. PED and Revenue

18. Total Revenue TR= Price x no. of units sold
Complete the next activity- PED and Revenue

19. Activity
A firm producing decorative candles lowers the price of one of its scented candles from £4 to £3.60 and finds that the weekly quantity demanded increases from 600 per week to 630
1. Calculate the PED for the scented candles, showing your working
2. Calculate the change in total revenue
3. Illustrate the demand curve, showing the change in revenue
4. Should the firm have lowered the price of their candles?
2268, 2400

20. Activity
A pizzeria lowers the price of its most popular takeaway pizza, the Margherita, from £5 to £4.50 and finds that the weekly quantity demanded increases from 60 to 72
Calculate the PED, showing your workings
Calculate the change in total revenue
Illustrate the demand curve, showing the change in total revenue
Should the firm have lowered its price?

21. Conclusions
If a firm has a product which is price inelastic and it lowers it’s price it will receive a fall in total revenue, if it increases its price it will receive an increase in total revenue
If a firm has a product which is price elastic and it lowers it’s price it will receive an increase in total revenue, if it increases it’s price it will receive a fall in total revenue.

22. Elasticity along a straight line
Elasticity is not a measure of the slope of the demand curve
For a straight line downward sloping demand curve, the value of PED falls as price falls
Pencil, ruler and graph paper.....

23. Illustrate a demand curve using the following points
Point A £20 Qty 60
Point B £18 Qty 80
Point C £10 Qty 160
Point D £8 Qty 180
Calculate the elasticity as we move from point A to point B
Calculate the elasticity as we move from point C to point D
What can we conclude from this?
A to B is
C to D is 0.625

24. Price Elasticity along a straight line demand curveB Q

25. Price Elasticity along a straight line demand curveB Q
At point A PED is ∞ (Q=0)
At point C PED is 0 (P=0)
At point B (exactly half way along the line) PED is 1

26. Factors Affecting PED In pairs
Think of a product which is likely to have price inelastic demand
Why does is have price inelastic demand?

27. Factors Affecting PED
Availability of substitutes, less substitutes = more inelastic
Time period- longer= more price elastic, habit, lack of info, durable goods purchased, l/t can change
Necessities have a lower PED than luxuries- increase in P unlikely to reduce D
Goods which form a relatively low proportion of total expenditure have lower elasticities than those which form a more significant proportion

28. Questions
Answer questions on sheet
PED WORKSHEET