Download Price Elasticity of Demand - Business-TES

Price Elasticity of
Demand
Can you…
Define and calculate it?
Show how useful it is to firms, Governments,
and Consumers?
IGCSE ECONOMICS
What is it
What shape is the Demand curve? Is it…
P
D1
D2
D3
Q
IGCSE ECONOMICS
Elasticity
The slope of the curve shows its elasticity*
It is calculated by: % change in quantity
% change in price
*This is not strictly speaking true, but will do to start with.
IGCSE ECONOMICS
What is it?
It is “How responsive demand is to a
change in price.”
SO, when price changes, does demand
change by only a little or is it by a lot?
IGCSE ECONOMICS
Interpreting our results
If you have an answer > 1, then demand is
very sensitive to price, this means a small
change in price leads to a
in demand
BIG change
Demand is said to be PRICE ELASTIC.
IGCSE ECONOMICS
Interpreting our results
If you have an answer < 1, then demand is
very in-sensitive to price, this means a
BIG change in price leads to only a
small
change in demand
Demand is said to be PRICE INELASTIC.
IGCSE ECONOMICS
Interpreting our results
If you have an answer = 1, then demand is
said to have unitary elasticity.
Price and demand change in the same
proportions.
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At the extremes
It is possible to get an answer of 0.
This is called Perfectly inelastic demand
What will happen to demand if price is
raised by any amount?
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At the extremes
It is possible to get an answer of infinity.
This is called Perfectly elastic demand
What will happen to demand if price is
raised by any amount?
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Revenue
To work out the revenue of the company
you need to : Multiply the Qty with the
Price,
In your answer this should be shown to
illustrate the difference in revenue after
the change in price.
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Worked examples
Now, try the worked examples
from the worksheet.
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So what?
Should a business with elastic demand put
up or lower its prices?
Should a business with in-elastic demand
put up or lower its prices?
Draw diagrams to show this
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Price Elasticity and Revenue
The firm sells 500 products at $70. The
price increases to $75 and the number of
products sold falls to 450.
The firm sells 1200 products at $44. The
price decreases to $37 and the number of
products sold increases to 1365.
What happens to revenue in each of these cases? What is the PED in
each of these cases?
IGCSE ECONOMICS
Answers
Price increase 7.14% Quantity decrease 10%
Revenue was: $35,000 Revenue now: $33750
Elasticity: 1.4 ELASTIC
Price decrease:15.9%Quantity increase: 13.8%
Revenue was: $52,800 Revenue now: $50505
Elasticity: 0.8 INELASTIC
IGCSE ECONOMICS
What makes demand more elastic?
Availability of substitutes
Strength of brand image
Time
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Questions
One of the exam papers (P4) requires you
to answer an essay style question.
This means we need to practice this!
See hints on how to write essays.
IGCSE ECONOMICS
Questions to answer
a. Explain why the price elasticity of
demand for foreign holidays is likely to be
elastic.
b. What would be the consequences of an
appreciation of the UK exchange rate
(price increase) on UK firms that supply
these foreign holidays?
IGCSE ECONOMICS