Transcript Price elasticity of demand

Price Elasticity of Demand
A Level
Year 1 Economics
21 March, 2017
Lesson Objectives:
• Define , explain and calculate Price
Elasticity of Demand
• Discuss the reasons as to why some
products will have elastic demand, whilst
others will have inelastic demand.
• Show elasticity on a diagram
…Starter Discussion…
• The Price of Petrol goes up…what happens to
demand?
• The Price of Cigarettes goes up…what happens to
demand?
• The Price of Ford Fiestas go up…what happens to
demand?
• The Price of a packet of chewing gum goes
up…what happens to demand?
• The Price of champagne goes up…what happens to
demand?
The concept of Elasticity
The responsiveness of one variable to changes in
another
PRICE ELASTICITY OF DEMAND:
This shows the responsiveness of Demand to changes in
Price.
When Price rises what happens to demand???
It falls…
But by how much?
This is what Price Elasticity of Demand can tell us. It
measures the extent to which demand will change in
response to changes in price.
If Price rises by 10%...
We know that demand will fall, but by how much…?
> By more than 10% ?
If so, then Demand is very responsive to changes in price.
Demand is therefore said to be Elastic.
> By less than 10% ?
If so, then Demand is not very responsive to changes in
price.
Demand is therefore said to be Inelastic.
Elasticity – what do we mean by
this word?
How elastic is demand = How responsive is demand
Think of it like an elastic band…
Elastic = demand is very responsive
Inelastic = demand is not very responsive
Is Demand Elastic or Inelastic?
• If the % change in the quantity demanded
is greater than the % change in price, then
demand is said to be elastic.
• If the % change in quantity demanded is
less that the % change in price, then
demand is said to be inelastic.
Abbreviations used in this topic
∆
P
QD
PED
= Change
= Price
= Quantity Demanded
= Price Elasticity of Demand
The Formula
Percentage Change Quantity Demanded
PED =
Percentage Change in Price
OR
=
%∆
QD
%∆ P
Maths Lesson!
• How do we work out a percentage change?
Price has gone from 10p to 16p, what is the
percentage change in price?
How do you work this out?
The calculation is the change (which is 6p) divided
by the original (which was 10p) multiplied by 100.
So… 6 X 100
10
The percentage change in price therefore was 60%
Self Test Questions
Calculate the PED in for the following examples. Show all
your workings.
1. The price of cappuccino at a local Starbucks increases
from £2 to £2.25. As a result, demand for cappuccino’s
drops from 16,000 a month to 14,570
2. Economics textbooks increase 30% in price, demand
drops 30%
3. When the price of Toshiba’s new laptop was dropped
from £800 to £750, demand increased 20%.
4. The Price of Petrol at the Chorleywood Petrol Station
goes up from 80p a litre to £1.05 and demand drops
from 10,000 customers a week to 9,860.
What does the answer mean?
The answer will always be a negative
IGNORE THE SIGN! it is the size of the number, not the
sign, which shows the actual elasticity.
• If demand is elastic, the value of the answer (ignoring the
sign) will be greater than 1.
• If demand is inelastic, the value of the answer will be less
than 1.
• If demand is unit elastic, the percentage change in demand
is the same as the percentage change in price, the value of
the answer (Still ignoring the sign) is equal to 1.
Self Test Activity (2)
• Go back to your answers from the
previous self test activity, and identify in
each case if demand is elastic or inelastic.
What makes a product Elastic or
Inelastic?
• Is it essential…? If so, demand will not be very
responsive to changes in price
• Is it addictive…? If so, demand will not be very
responsive to changes in price
• Does it form a big part of your income? If it
doesn’t, demand will not be very responsive to
changes in prices. If it does, demand will be
more responsive to changes in price.
• Does it have many substitutes? If it does,
demand will be very responsive to changes in
price. If there are no, or few, substitutes demand
will not be very responsive to changes in price.
• Demand is more elastic in the long run because
it takes time to respond to a price change
How to show elasticity on a
diagram…
• Page 26
• Draw the diagrams, with a explanation of
each one