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
Price Elasticity of
Demand – the
responsiveness of
quantity demanded to
changes in price.
Elasticity -the
responsiveness of
quantity
demanded to
changes in other
variables e.g.
price and
incomes.
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.
INFERIOR GOOD:
a good which if
income were to
increase, there
would be a
decrease in demand
 Inelastic demand – when quantity
demanded is relatively unresponsive to
changes in other variables.
Price Elasticity of Demand
Price
discrimination:
e.g. phone
companies and
different rates
during the day
USES
FOR PED
Business
planning:
production
levels,
employment,
affect on stocks
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
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
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 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
A measure of how much the quantity demanded of one
good responds to a change in price of the other good.
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 …
1. Change in price of good x = 35% QD change of good y = 25%
2. Price change = 15% QD change = 25%
3. Price change = 40% QD change = -20 %
4. Price change = -18% QD change = -10%
5. Price change = -40% QD change = 22%
a) Is the cross price elasticity positive (P of Good 1, Q of Good 2 move in same
direction i.e. both increase) or negative ( P of Good 1, Q of good 2 move in
different directions i.e. One increases the other decreases) ?
b) Is the good a substitute or complement?
To what extent
does a change in
price affect
quantity supplied?
CW
ELASTICITY: Supply and Income
Date: 29.09.2014
30
Learning objective:
Understand how to find the
elasticity of markets and different
goods
Apply a knowledge of cross
elasticity and price elasticity of
supply
Be able to discuss the business
revenue of different elasticity
estimates
l
Considering the
info provided,
write in your own
definitions of
Luxury good,
normal good,
necessity, and
inferior 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.
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?)
To what extent
does a change in
income affect
quantity
demand?
Year
Calculating Price Elasticity of
Supply
Average price
of biscuits (£
per kg)
2011
11
2012
11.50
Using the information available, how
would you expect the output of biscuit
manufacturers to respond to the
change in the price of biscuits?
Price elasticity of
supply for biscuits
is 1.6.
To what extent does
a change in the price
of a good affect the
quantity supplied?
How would
you expect
the recent
increase in
the price of
cocoa to
affect its
supply?
http://www.ft.com/cms/s/0/485bf2e4-fa4a-11e3-a328-00144feab7de.html#axzz35Y8THUmA
l
http://www.bbc.co.uk/news/business-24607261
INCOME
ELASTICITY
OF DEMAND
=
% CHANGE IN QD
------------------------% CHANGE IN INCOME

Measures the
responsive of
a change in
income. The
+ or – sign is
important as
it makes an
increase or
decrease in
the QD

-


Normal goods = +IED
real disposable income
increases and demand for
product also increases
Income elastic go0ods =
estimate of IED > 1
(relatively responsive to
change in income)
Income inelastic goods =
estimate of IED <1
(relatively unresponsive to
change in income)


NEGATIVE MOVEMENT:
denotes an inferior good.
As income increases
demand for this good
decreases.
POSITIVE MOVEMENT:
Superior goods, demand
increases considerably
more in relation to income
increase – e.g.s are
dependent on beginning
income