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PRICE ELASTICITY OF DEMAND Lesson Objectives All students will understand Price Elasticity of Demand The determinants of PED Most students will understand the importance od PED Some students will link PED to potential profits for business Discussion points pg 25 Elasticity – the concept Elasticity measures the extent to which quantity demanded will change – The responsiveness of quantity demanded to changes in price – Where % change in quantity demanded is greater than % change in price – elastic – Where % change in quantity demanded is less than % change in price - inelastic Elasticity – the concept When price rises what happens to quantity demanded? It falls BUT how much does it fall? If the price of oil rises by 10% what happens to quantity demanded? • We know it will fall • By more than 10%? • By less than 10%? What if we were talking about the price of a new Ford Focus rising by 10%? How is the value calculated? Ped = If answer is between 0 and -1: the relationship is inelastic If the answer is between -1 and infinity: the relationship is elastic Note: PED has – sign in front of it; because as price rises quantity demanded falls and vice-versa (inverse relationship between price and quantity demanded) Worked Example Suppose that quantity demanded falls from 60 to 40 when the price rises from £3 to £5. The elasticity measure is given by: First we calculate % change in Q demanded (60-40)/60=-33% Then we calculate % change in P (5-3)/3=66% -33/66=-0.5 remember the – sign! Is this elastic or inelastic? Task – calculate the PeD for the following Price goes from £9 to £8, demand increases from 100 to 200 units Price goes down from £2 to £1, demand increases from 800 to 900 units answers Determinants of Elasticity Time period – the longer the time then the more price elastic a good is likely to be Number and closeness of substitutes – the more substitutes the more price elastic [you’ll hear me going on about this when we look at how competitive markets are] The proportion of income taken up by the product – the smaller the proportion the more price inelastic Luxury or Necessity - for example, addictive drugs like cigarettes….necessity….price inelastic Elasticity shown on the demand curve Perfectly Elastic/Inelastic Perfectly elastic demand Perfectly inelastic demand Plenary Show your understanding pg 29
