Transcript Elasticities File

Elasticities
Price Elasticity of Demand
 PED measures the responsiveness of
demand to a change in price.
PED Formula
 % change in QD
 % change in P
Oil
 In 1973 oil increases in price from $3 a
barrel to $12 a barrel. The demand from
the United States fell from 4.8 million
barrels a day to 4.5 million barrels a day.
Calculate the PED of oil in the USA.
Football boots
 The price of Adidas Predator Boots rises
from $150 to $200. The quantity
demanded falls from 500,000 to 250,000.
Calculate the Price Elasticity of Demand
for these boots.
Soup
 Anna sells 300 bowls of organic
vegetable soup for £4 a day. She
increases the price to £4.50 The PED for
the soup is – 0.4. Calculate the change in
revenue following the increase in price.
New York Times
 The New York Times before 2009 sold
1.2 million copies a day. In 2009 the NYT
increased its price from $1.50 to $2. The
PED of the New York Times is – 0.25. By
how much did the revenue change?
Elastic or inelastic?
 If goods or services have a PED between
0 and minus 1 they are inelastic.
Basically, a big change in price has lead
to a relatively small change in quantity
demand.
Elastic or inelastic.
 If goods or services have a PED which is
a greater negative than -1 (so, -1.3, -1.7,
-2.4 etc) the goods are elastic. A
relatively small change in price will lead
to a larger change in quantity demand.
Will it be elastic or
inelastic?
 1. A good with many substitutes will be
elastic.

Will it be elastic or
inelastic?
 2. An unessential good will be elastic.
Will it be elastic or
inelastic?
 3. If you only spend a small percentage
of your money on the good, then you
won’t even notice price changes. They
will be inelastic.
Why?
 New York Times
 Anna’s soup
Adidas Boots
Oil
 Explain in one or two sentences why
each product has such a different PED.
Price elasticities of
demand

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Oil
Beer
Cigarettes
Cigarettes (teenagers)
Airline flights
Fruit shakes
-0.07
-0.4
-0.2
-0.7
-1.5
-2.2
PED and total Revenue
Inelastic Good
Increase price
Total Revenue
Inelastic Good
Decrease Price
Total Revenue
Unit Elastic Good
Increase Price
Total Revenue
Unit Elastic Good
Decrease Price
Total Revenue
Elastic Good
Increase Price
Total Revenue
Elastic Good
Decrease Price
Total Revenue
Please remember never to
forget
 Price Elasticity of
Demand will only
ever tell you about
changes in total
revenue – not profit.
Two types of curves.
A sneaky question
 This demand curve is
A) elastic
 B) inelastic
 C) the value of PED
is constant at all
points on the curve
 D) the value of PED
varies along the
curve.
PED and Rice
 Compare the PEDs of rice in the
developed world and the developing
world. (8)
What affect will each of
the following have?
 Airlines have to pay higher prices for
fuel?
 The British government is considering
increasing university tuition fees by 100%
 Workers on tobacco farms demand and
receive a 20% pay increase.
What affect will each of
the following have?
 The two main producers of coffee in the
world are Vietnam and Brazil. A frost in
Vietnam has destroyed 50% of their crop.
 The British government announces that it
will no longer subsidise bus transport,
resulting in an increase in the price of
bus tickets
What affect will each of
the following have?
 Nissan reduce their prices of their family
cars by 20%. What do Toyota need to
do? What do Mercedes need to do?
 Irish incomes have fallen by 12% on
average in the last 12 months. What
affect will it have on… Airlines operating
to and from Ireland, Irish milk farmers,
bakers.
Minus or negative
 Price elasticity of demand
 Price elasticity of supply
 Income elasticity of demand
Income elasticity of
demand – actual numbers
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Automobiles
Books
Restaurant Meals
Cigarettes
Margarine
Public Transportation
2.46
1.44
1.40
0.06
-0.20
-0.36
PRICE ELASTICITY OF SUPPLY
PES: the responsiveness of supply to a
change in price.
When the price goes up, will supply go up
too.
PES
PES
2006 FOOTBALL WORLD
CUP
WHO GOES TO THE
WORLD CUP?
PES
% change in QS
% change in P
The price of steel
has risen by 18% in
the last year. Global
supply has risen
from 18 million
tonnes to 19.5
million tonnes.
Calculate the PES
of steel.
FACTORS AFFECTING PES
Time
Stock levels
Ease of entry into the market
Spare Capacity
PES OF RICE
Reading pages 32 and 33,
answer the follwing question. To
what extent is time an important
factor in the PES of rice. (6)
Heating Oil
1.57 (Short Run)
Gasoline
1.61 (Short Run)
Tobacco
7.0 (Long Run)
Housing
1.6–3.7 (Long Run)
Cotton
0.3 (Short Run)
1.0 (Long Run)
Price elasticity of Supply
 The world price of coffee increases by
45%. The Vietnamese government wants
to increase the supply of coffee to profit
from the higher prices. Comment on the
likely PES of coffee.
Price elasticity of supply
Please remember, what are
complements and what are
substitutes.
 Coffee and tea
 Play station machine and play station
games
 Cars and petrol
 Holidays in Crete and holidays in Rhodes
 Pencils and strawberries
 CNN and Fox News
Cross Elasticity of
Demand
 During World War 2 the price of tea in
Britain rose by 250%. What do you think
happened the demand for
 A) Coffee
 B) Sugar
 C) Carrots
Cross Elasticity of
Demand
 % change QD of good A
% change P of good B
Which type of goods will have a positive
Cross Elasticity of Demand?
Which types of goods will have a negative
Cross Elasticity of Demand?
Cross Elasticity of
Demand
 Due to drought in the 1970s in Britain,
potatoes rose in price by 50%. As a
consequence, the demand for pasta rose
by 20%.
 The price of oil rose from $43 to $73
dollars a barrel between 2004 and 2006.
In the same time period, the demand for
the Ford Mustang fell from 128,000 to
96,000.
Cross Elasticity of
Demand
 Would these have a positive or negative
result?
 Pork and beef
 Laptops and desktops
 SUVs and Petrol
 Wine and beer
 X-box and x-box games
Cross price elasticity of
demand
 Which of the following goods are
likely to have a positive cross
elasticity of demand between
them?
 A Motor vehicles and rail travel
 B Beef and leather
 C Motor vehicles and petrol
 D Beef and animal feed
Applied Economics
 In general, is the PED of food types elastic or
inelastic? Why?
 Not mentioned in the list, what type of food
might have a PED of, say, -1.9?
 The CED (XED) of carcass meat and fresh fish
is +0.15. What does that tell us?
 Could you think of goods that might have a
stronger XED? (Not just food)
Applied Economics
 Train travel, bus travel, car travel and plane
travel. Which goods are normal? How do you
know?
 What non-price factors have seen a slight rise
in train and bus travel since the 1990s?
 Motorists are unresponsive to changes in the
costs of motoring, how do we know?
 Leaving price aside, what other factors are
encouraging people to drive cars?
Applied economics
 What effect do monopolies have on the
supply of transport?
 Why do you think bus and rail fares have
risen is real terms?