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Business use of Elasticity
Price Elasticity of Demand
PeD
Elasticity – the concept
• The responsiveness of one variable to changes
in another
• When price rises what happens to demand?
Demand falls
BUT!
How much does demand fall?
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Elasticity – the concept
• If price rises by 10%, what happens to demand?
• We know demand will fall
• By more than 10%?
or
• By less than 10%?
• Elasticity measures the extent to which
demand will change
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Elasticity
The Formula:
Ped =
% Change in Quantity Demanded
___________________________
% Change in Price
Note: PED has – sign in front of it; because as price rises
demand falls and vice-versa
(inverse relationship between price and demand)
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Consider a 10%
increase in
price
PeD Mantra….
• If answer is between 0 and -1
• e.g. -0.4 or -0.8
• The relationship is inelastic
Consumers
DO NOT
react much to a
change in price
• If the answer is between -1 and infinity
• e.g. -1.4 or 2 or 12.3
Consumers
DO react
To changes in
• The relationship is elastic
prices
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Influence of Elasticity
• Price Inelastic:
• % change in Q < % change in P
•
Price
inelastic only
a of
e.g. a 5% increase in price would be met by a helps
fall in sales
something less than 5%
business with
raising prices
• Revenue would rise
• A 7% reduction in price would lead to a rise in sales of
something less than 7%
• Revenue would fall
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Influence of Elasticity
• Price Elastic:
• % change in quantity demanded > % change
in price
Price elastic
helps a
• e.g. A 4% rise in price would lead to sales falling by
business
something more than 4%
with price
reductions
• Revenue would fall
• A 9% fall in price would lead to a rise in sales of
something more than 9%
• Revenue would rise
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Elasticity
Always ‘think about a
10% change in price.
• If demand is price
elastic: e.g. -5.5
• If demand is price
inelastic: e.g. -0.5
• Increasing price
would reduce TR
• Increasing price
would increase TR
• Reducing price
would increase TR
• Reducing price
would reduce TR
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The determinants of PED
A number of factors affect the value of the PED coefficient including:
The availability of substitutes (similar products) – the closer the
substitutes the higher the price elasticity
Are football match
Why do you think that top football clubs can get away
withelastic
charging
tickets
or
inelastic?
such high prices:
The price of competitor goods – if the price of goods in competition
with a product increase this will affect demand and price elasticity
Time – the longer the time period the higher the price elasticity. Given
more time other firms have the ability to produce similar products and
customers have more chance of adapting their buying habits
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How have the availability (and price) of substitutes and time affected the PED for wind turbines ?
You will need access to
the internet to watch
11
these video clips
The determinants of PED
A number of factors affect the value of the PED coefficient including:
Branding – firms spend time and money building up their brand
image. By creating brand loyalty firms know that their customers
will be willing to pay more for the product and they can therefore
raise prices.
Income - if consumer incomes are higher then the issue of price
becomes less important to the consumer and it is easier for firms
to raise price.
What has happened to price elasticity of demand for
restaurants and theatres (luxury goods) as the
credit crunch hits the UK?
You will need access to
the internet to watch
these video clips
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Your task
Are these
ELASTIC
or
INELASTIC
Elastic or Inelastic?
If you were to put
your prices up by 10%
would you loose MORE
(elastic) or LESS
(inelastic)
customers???
There are lots of alternatives for
customers to choose from!
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Elastic
14
Elastic or Inelastic?
And if they
dropped the
price by 10% I
still couldn’t
afford one!
If you can afford one of these,
your not bothered by price!
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If you were to put
your prices up by 10%
would you loose MORE
(elastic) or LESS
(inelastic)
customers???
Inelastic
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Elastic or Inelastic?
If you were to put
your prices up by 10%
would you loose MORE
(elastic) or LESS
(inelastic)
customers???
Are customers brand loyal
or price sensitive? More loyal?
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Inelastic
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Elastic or Inelastic?
If you were to put
your prices up by 10%
would you loose MORE
(elastic) or LESS
(inelastic)
customers???
There are lots of alternatives for
customers to choose from!
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Elastic
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Elastic or Inelastic?
Is it any different
between Pizza Express
eat in, Domnino Pizza
delivery and a Asda own
brand pizza?
Would customers notice 30p
increase on a £3 pizza?
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If you were to put
your prices up by 10%
would you loose MORE
(elastic) or LESS
(inelastic)
customers???
Elastic
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Problems of measurement
of price elasticity
Problems of measurement of
price elasticity
The Price Elasticity of Demand for a product is constantly changing in a
dynamic world. It is very difficult for firms to measure because:
• Difficulty in finding accurate information
• Price elasticity changes over different price ranges
• Price elasticity will change over the period of the economic
cycle e.g. it will be affected in a recession
• Tastes and fashions are constantly changing
• Competitors don’t stand still. They are continually improving
existing products, bringing out new products and trying to
promote their products.
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Activity – PED in Britain today
Watch this video of budget shops in Credit Crunch Britain:
You will need access to the
internet to watch this video clip.
The video suggests that budget shops are doing well in the
current economic climate.
Why do you think that customers are flocking to budget
shops and what does this suggest about the PED of the
products that these stores sell?
Discuss the following points when answering this question:
 The availability of substitutes
 The price of competitors’ goods
 Incomes of consumers
 Branding
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2.17 Pricing
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Identify products/companies which adopt
each price strategy
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Plenary…
• If Coca Cola PeD = -0.1
• Is it worth them cutting or raising
their prices?
• The Sun PeD = -0.8
• Is it worth them cutting or raising
their prices?
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