Download - Price elasticity of demand
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AS Unit F581:AS Unit F581:Markets in actionMarkets in action
Competitive markets Competitive markets and how they workand how they work
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Price elasticity of Price elasticity of demanddemand
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Definition and formulaDefinition and formula
Definition The responsiveness of quantity demanded to a change in price
Definition The responsiveness of quantity demanded to a change in price
FormulaFormula
price in change percentagedemanded quantity in change percentage
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TerminologyTerminology
Price elastic demandWhere the percentage change in quantity demand is greater than the percentage change in price
PED is less than -1
Price elastic demandWhere the percentage change in quantity demand is greater than the percentage change in price
PED is less than -1
Price inelastic demandWhere the percentage change in quantity demanded is less than the percentage change in pricePED is between -1 and zero
Price inelastic demandWhere the percentage change in quantity demanded is less than the percentage change in pricePED is between -1 and zero
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6)
Work in pairs
Decide whether the product is price elastic or price inelastic
and why
Task 1Task 1
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Determinants of PED
The number of
close substitutes
The number of
close substitutes
The degree of necessity
The degree of necessity
The % of a consumer’s income
The % of a consumer’s income
Time periodTime period
The breadth of definition
The breadth of definition
Extent of habitual
consumption
Extent of habitual
consumption
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Usefulness of PEDUsefulness of PEDBusinesses might use the concept of Ped to help them find answers to the following:
Should firms charge a high or low price when a product is launched?
Should producers absorb a tax, or can they pass it onto consumers?
Will discounts lead to a rise in total revenue or will extra sales actually cause total spending by consumers to fall?
Should businesses charge the same price to all consumers or would a policy of price discrimination be more profitable?
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Task 2Task 2Read the case study about the pricing strategy of airlines and suggest how a knowledge of the price elasticity of demand of air travel might be useful to airlines.
Think about:- what is the impact on sales as fares rise?- will revenue rise or fall?- how would knowing the PED help?
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Task 3Task 3Using the diagrams on the worksheet explain how the change in price indicated would affect the revenue from sales
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Q2Q1
P2
P1
D
Quantity demand
Price
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Quantity demandQ2 Q1
P2
P1
D
Price
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Task 4Task 4A business cannot know its PED with
certainty. All PED values are estimates. They can be estimated in two ways: price experimentation econometrics
Why might the PED estimates derived from each method be unreliable? answer on your worksheet
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The nature of The nature of ‘estimates’‘estimates’
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Task 5Task 5Answer the past paper questions on flybe in the worksheet