Download To what extent does a change in price affect quantity demand?

To what extent
does a change in
price affect
quantity demand?
CW
Price Elasticity of Demand
Date: 24.09.2014
Learning objective:
Understand the concept of price
elasticity
Understand how to find the
elasticity of markets and different
goods
Be able to discuss the business
revenue of different elasticity
estimates
l
Price Elasticity of Demand
Price Elasticity of Demand
GRAPHED EXPAINATION
Price Elasticity of Demand
Time period:
elastic in long
run, more
inelastic in
short run
Habit forming
goods; e.g.
cigarettes
and drugs =
inelastic
Number of
Close
substitutes:
Substitution
effect
Luxuries and
necessities:
Necessities =
inelastic,
Luxuries =
elastic
FACTORS
THAT
INFLUENCE
THE VALUE OF
PED
Percentage of
income spent
on good
Price Elasticity of Demand
Price
discrimination:
e.g. phone
companies and
different rates
during the day
Business
planning:
production
levels,
employment,
affect on stocks
USES
FOR
PED
Total revenue and
profit:
Price inelastic = rise
in price = rise in
spending on the
good
Calculating
changes in
demand
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Following their
promotion to the
Premier League, the
cheapest season ticket
at Burnley F.C. has
increased from £329 to
£499. How would you
expect this to affect
sales of season tickets?
Burnley F.C. sold 15000
season tickets for
2013/14 season.
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Answer of less than -1 e.g. -1.1 or more = price elastic demand (relatively
responsive to changes in price)
Answer of more than -1 e.g. -0.5 = price inelastic demand (relatively
unresponsive to changes in price)
Answer of -1 = price unitary demand (any change in price/income is
exactly matched by a change in quantity demanded)
The price elasticity of demand for Burnley F.C. season tickets (-0.59) is …
Inelastic
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Why is the demand for Burnley F.C. season tickets price inelastic, or
relatively unresponsive to changes in price?
What kinds of goods and services would be, similarly or more, price
inelastic?
What kinds of goods would be price elastic, or relatively responsive, to
changes in price?
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Determinants of Price Elasticity
The extent to which you can substitute consumption of the good for
consumption of another good. A good which is a necessity will have price
inelastic demand for example.
% of income spent on the good. If a large part of your income is spent on
the good it will have price elastic demand because even a small % increase
in price will have a large effect on your income.
As the price of a good increases, price elasticity will increase. Consumers
will find substitute goods more attractive (the opportunity cost of not
switching to a substitute increases).
Time; that is, if you have more time to make your purchase you have more
time to find substitutes.
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Calculate the price elasticity of demand when …
•Price change = 40% QD change = -20%
•Price change = -12.5% QD change = 25%
•Price change = 100% QD change =- 33%
•Price change =- 20% QD change = 33%
•Price change = 33% QD change = 0
•Price change = -92% QD change = 25%
Is the price elasticity of demand elastic or inelastic?
To what extent
does a change in
price affect
quantity demand?
Price Elasticity of Demand
Knowledge of the price elasticity of demand for their season tickets is
useful for Mike Garlick and John Banaszkiewicz, the owners of Burnley
F.C.?
If a business has information
about price elasticity it can
use it to predict what will
happen to revenue and profit
if price changes:
Price inelastic – price
increase will increase
revenue and profit
Price elastic – price increase
will decrease revenue and
profit
http://www.theguardian.com/football/blog/2013
/jan/13/premier-league-prices-attendances
Elasticity -the responsiveness of
quantity demanded to changes in
other variables e.g. price and
incomes.

Price Elasticity of
Demand – the
responsiveness of
quantity demanded to
changes in price.
COMPLEMENT –
PRODUCTS WHICH ARE
USED TOGETHER

Elastic demand – when
quantity demanded is
relatively responsive to
changes in other variables.
Substitute – products which
could be used for the same
purpose.
 Inelastic demand – when quantity
demanded is relatively unresponsive to
changes in other variables.
To what extent does a change
in the price of one good affect
quantity demanded of other
goods?
CW
Cross Elasticity of Demand
Upon its launch, it was
rumoured that
Amazon were selling
their Kindle Fire
tablet at cost. Why
would they do this?
lJeff
Bezos at the launch of the Kindle Fire Tablet .
To what extent does
a change in the price
of one good affect
quantity demanded
of other goods?
Cross elasticity of demand
Ashas
It
part
been
of the
the2014
policy
budget,
of
the
successive
tax
on cigarettes
Governments
was increased
to
maintain
by
28p. Aapacket
high level
of 20ofKing
tax on
Sized
tobaccoand
Benson
products
Hedges
in order
Gold now
to
reduce
costs
approximately
tobacco consumption
£8.80.
and the prevalence of smoking.
Between
How
would
1993
youand
expect
2000this
a price
tobacco duty
increase
to affect
‘escalator’,
the demand
whichfor
saw year-on-year
smoking
cessationincreases
productsin
like
tobacco duty
Nicotine
gum ahead
and patches?
of inflation,
was implemented
Would
demand increase
with the
oraim
is of
reducing
there
no link
consumption
between the
stilltwo?
further.
http://www.thetma.org.uk/policylegislation/taxation/
To what extent
does a change in
income affect
quantity demand?
Cross Elasticity of Demand
Year
Price of
cigarettes (£)
Sales of
packets of
nicotine
patches (000s)
2013
8.50
100
2014
8.80
115
Using the information in the table,
calculate the cross elasticity of
demand for cigarettes and nicotine
patches. What does your answer tell
you?
To what extent does
a change in the price
of one good affect
quantity demanded
of other goods?
Cross Elasticity of Demand
Substitutes – have a positive cross elasticity (the
change in the price of good B causes a similar change
in the quantity demanded of good a e.g. B goes up, A
goes up). The bigger the number, the closer they are
substitutes.
Complements – have a negative cross elasticity (the
change in the price of good B causes an opposite
change in quantity demanded of A). The smaller the
number, the more the goods complement one another.
To what extent does
a change in the price
of one good affect
quantity demanded
of other goods?
Cross Elasticity of Demand
Calculate the cross elasticity of demand when …
•Change in price of good x = 35% QD change of good y = 25%
•Price change = 15% QD change = 25%
•Price change = 40% QD change = -20 %
•Price change = -18% QD change = -10%
•Price change = -40% QD change = 22%
Is the good a substitute or complement?
The responsiveness of quantity supplied to
changes in price is determined by:
1. Time – a firm needs time to increase production in response to
change in price (production lag)
2. Spare capacity – is the firm able to increase production because it
has spare capacity e.g. labour not working at full capacity, machinery
could be used for longer.
3. Available raw materials (level of stocks)
4. Substitutability of factors of production: can the factors be easily
moved in and/or out (Can other resources by substituted to the
production of this good?)
Businesses can use price elasticity of supply to predict how a supplier will
respond to a change in the price of the product that they produce.