Transcript Elasticities

Price Elasticity
of Demand
Two types of curves.
Price Elasticity of Demand
 PED
measures the responsiveness of
demand to a change in price.
PED Formula
%
change in QD
 % change in P
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.
Price elasticities of demand
 Oil
 Beer
 Cigarettes
 Cigarettes
(teenagers)
 Airline flights
 Fruit shakes
Price elasticities of demand
 Oil
 Beer
 Cigarettes
 Cigarettes
(teenagers)
 Airline flights
 Fruit shakes
-0.02
-0.4
-0.2
-0.7
-1.5
-2.2
Factors affecting PED
 1.
A good with many substitutes will be
elastic.

Will it be elastic or inelastic?
A
good without substitutes will be
inelastic.
Will it be elastic or inelastic?
 2.
A non-essential good will be elastic.
Addictive goods
 Will
addictive
goods be elastic or
inelastic?
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
 Explain
Adidas Boots
Oil
in one or two sentences why each
product has such a different PED.
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.
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. As a result, she now sells only 270
bowls of soup a day. What is the PED of
Anna’s organic vegetable soup?
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.