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Price Elasticity of Demand A Level Year 1 Economics 29 April, 2017 Lesson Objectives: • Define , explain and calculate Price Elasticity of Demand • Discuss the reasons as to why some products will have elastic demand, whilst others will have inelastic demand. • Show elasticity on a diagram …Starter Discussion… • The Price of Petrol goes up…what happens to demand? • The Price of Cigarettes goes up…what happens to demand? • The Price of Ford Fiestas go up…what happens to demand? • The Price of a packet of chewing gum goes up…what happens to demand? • The Price of champagne goes up…what happens to demand? The concept of Elasticity The responsiveness of one variable to changes in another PRICE ELASTICITY OF DEMAND: This shows the responsiveness of Demand to changes in Price. When Price rises what happens to demand??? It falls… But by how much? This is what Price Elasticity of Demand can tell us. It measures the extent to which demand will change in response to changes in price. If Price rises by 10%... We know that demand will fall, but by how much…? > By more than 10% ? If so, then Demand is very responsive to changes in price. Demand is therefore said to be Elastic. > By less than 10% ? If so, then Demand is not very responsive to changes in price. Demand is therefore said to be Inelastic. Elasticity – what do we mean by this word? How elastic is demand = How responsive is demand Think of it like an elastic band… Elastic = demand is very responsive Inelastic = demand is not very responsive Is Demand Elastic or Inelastic? • If the % change in the quantity demanded is greater than the % change in price, then demand is said to be elastic. • If the % change in quantity demanded is less that the % change in price, then demand is said to be inelastic. Abbreviations used in this topic ∆ P QD PED = Change = Price = Quantity Demanded = Price Elasticity of Demand The Formula Percentage Change Quantity Demanded PED = Percentage Change in Price OR = %∆ QD %∆ P Maths Lesson! • How do we work out a percentage change? Price has gone from 10p to 16p, what is the percentage change in price? How do you work this out? The calculation is the change (which is 6p) divided by the original (which was 10p) multiplied by 100. So… 6 X 100 10 The percentage change in price therefore was 60% Self Test Questions Calculate the PED in for the following examples. Show all your workings. 1. The price of cappuccino at a local Starbucks increases from £2 to £2.25. As a result, demand for cappuccino’s drops from 16,000 a month to 14,570 2. Economics textbooks increase 30% in price, demand drops 30% 3. When the price of Toshiba’s new laptop was dropped from £800 to £750, demand increased 20%. 4. The Price of Petrol at the Chorleywood Petrol Station goes up from 80p a litre to £1.05 and demand drops from 10,000 customers a week to 9,860. What does the answer mean? The answer will always be a negative IGNORE THE SIGN! it is the size of the number, not the sign, which shows the actual elasticity. • If demand is elastic, the value of the answer (ignoring the sign) will be greater than 1. • If demand is inelastic, the value of the answer will be less than 1. • If demand is unit elastic, the percentage change in demand is the same as the percentage change in price, the value of the answer (Still ignoring the sign) is equal to 1. Self Test Activity (2) • Go back to your answers from the previous self test activity, and identify in each case if demand is elastic or inelastic. What makes a product Elastic or Inelastic? • Is it essential…? If so, demand will not be very responsive to changes in price • Is it addictive…? If so, demand will not be very responsive to changes in price • Does it form a big part of your income? If it doesn’t, demand will not be very responsive to changes in prices. If it does, demand will be more responsive to changes in price. • Does it have many substitutes? If it does, demand will be very responsive to changes in price. If there are no, or few, substitutes demand will not be very responsive to changes in price. • Demand is more elastic in the long run because it takes time to respond to a price change How to show elasticity on a diagram… • Page 26 • Draw the diagrams, with a explanation of each one