price elasticity of demand. what is price elasticity of demand? price elasticity measures how...
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PRICE ELASTICITYOF DEMAND
WHAT IS PRICE ELASTICITY OF DEMAND?
Price Elasticity measures how responsive demand is to changes in price.
Quantity Demanded (per week)
100
200
300
400
500
600
700
800
₤.10
₤.20
₤.30
₤.40
₤.50Pri
ce
Demand for Mars bars
At ₤.30 the shop sells 300 mars bars per week.
Dropping the price to ₤.20 the shop sells ______ mars bars per week.
HOW DOES PRICE IMPACT MARS SALES?
Quantity Demanded
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800
₤100
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An Elastic Demand Curve
EXPLAIN THE CHANGE IN PRICE AND QUANTITY.. PRICE DROPS FROM $300 TO _____ DEMAND INCREASES FROM _________ TO ____________
Quantity Demanded
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Effects on revenue:
₤300 x 300 = ₤ 90,000
₤200 x 620 = ₤ 125,000
Extension
Quantity Demanded
100
200
300
400
500
600
700
800
₤100
₤200
₤300
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An Elastic Demand Curve
A small increase in price by ₤50 results in a sharp fall in quantity demanded.
Quantity Demanded
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800
₤100
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Calculating % Change $300 to $350 in % is CHANGE / ORIGINAL X 100
50/ 300 = 16.6% +
Quantity Demanded
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₤100
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Calculating % Change QD changes 300 to 150
CHANGE / ORIGINAL X 100
150/ 300 = 50% -
•Price increased by 16.6%
•Quantity demand fell by – 50%
Calculating Elasticity of Demand
ELASTIC DEMAND CURE
Demand is Elastic when a percentage change in price results in a proportionally LARGER percentage change in quantity demanded.
Handout Page 2
Quantity Demanded
100
200
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400
500
600
700
800
₤100
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An Inelastic Demand Curve
Dropping the price $300 to ₤200 the demand increases only $ 300 to 340.
CALCULATE % CHANGES
•Dropping the price $300 to ₤200
• the demand increases only $300 to 340.
• Remember % = Change / Original X 100.
Quantity Demanded
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An Inelastic Demand Curve
An increase in price by ₤50 results in a very small decrease in the quantity demanded.
Inelastic demand is when a percentage change in price results in a proportionally smaller percentage change in quantity demanded.
INELASTIC DEMAND CURE
Handout Page 3
Quantity Demanded
100
200
300
400
500
600
700
800
₤100
₤200
₤300
₤400
₤500Pri
ce
Extension
Effects on revenue:
₤300 x 300 = ₤ 90,000
₤200 x 340 = ₤ 68,000
DISCUSSION, WHICH OF THE FOLLOWING ARE PRICE ELASTIC OR PRICE INELASTIC?
Percentage change quantity demanded
Percentage change in Price
=
Price Elasticity of Demand
Percentage change quantity demanded divided by Percentage change in price
HOW TO CALCULATE PRICE ELASTICITY OF DEMAND
Handout Page 6
Quantity Demanded
100
200
300
400
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₤100
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Calculate the;a)% change in Priceb)% change in QDc)Price elasticity of
demand d)Is product Elastic or
Inelastic?
Quantity Demanded
100
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₤100
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₤500Pri
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The price has changed from ₤300 to ₤200 change = ₤100
The percentage change in price -₤100 ÷ ₤300 x 100 = 33.33%
Demand has changed from 300 to 640 change = 340
The percentage change in demand 340 ÷ 300 x 100 = 113.33%
Handout Page 7
Percentage (%) change quantity demanded
Percentage (%) change in Price
=
Price Elasticity of Demand
The percentage change in demand = 113.33%
The percentage change in price = -33.33%
Price Elasticity = -3.4
CALCULATING THE PRICE ELASTICITY OF DEMAND
Handout Page 4
Price Elasticity = -3.4
Demand for a product usually rises when the price falls, the relation between then is inverse this is why we get a negative figure. This minus sign is sometimes ignored.
The number 3.4 shows the degree of elasticity – This is greater than 1 which means demand is Elastic.
PRICE ELASTICITY OF DEMAND
•ANSWER IS ALWAYS –
•Answer greater than 1 is elastic. (-2.4)
•Answer less than 1 is inelastic. (-0.3)
PRICE ELASTICITY VALUES
Price elastic = more than 1 the % change in price will lead to a Larger %
change in quantity demanded.
Price inelastic = less than 1 the % change in price will lead to a Smaller
% change in quantity demanded.
Handout Page 7
Fab Tuck sells confectionary.
Last week, they set the high price of 30p for Mars bars and sold 20.
This week, they decided to reduce the price to 27p and sells 30.
Work out whether Mars is price elastic and inelastic
FAB TUCK CO
FIRST YOU NEED TO WORK OUT THE PERCENTAGE CHANGE.Week
1Week
2Percentage
change
20 30
30p 27p
Percentage = Change x 100
Original
Price
Quantity
Week1
Week2
Percentage change
20 30 50%
30p 27p -10%
Quantity
Price
Elasticity = 50% -5
-10%
Quantity Demanded per week
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Quantity Demanded
A company selling specialist drill bits increases the price from ₤20 to ₤40.
What is the weekly revenue the company is receiving at the original price?___________________What is the weekly revenue the company is receiving at the new price?___________________
Highlight the area of the graph that represents the gain in revenue.Highlight the area of the graph that represents the loss in revenue.
₤10
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₤30
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Price elasticity and company revenue
Quantity Demanded per week
100
200
300
400
500
600
700
800
Quantity Demanded
₤.10
₤.20
₤.30
₤.40
₤.50
Pri
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A retail store selling “KitKats” increases the price from twenty pence to thirty pence. Below is the demand curve.
What is the weekly revenue the company is receiving at the original price?___________________What is the weekly revenue the company is receiving at the new price?___________________
Highlight the area of the graph that represents the gain in revenue.Highlight the area of the graph that represents the loss in revenue.
Handout Page 4
A demand curve is Inelastic when___________________________________________________________________________________________________________________________________________________________________________________________________
Price elasticity =
To calculate a percentage change in demand:
Quantity Demanded
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₤100
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The price has changed from ₤300 to ₤200 change = _____
The percentage change in price -₤100 ÷ ₤300 x 100 = _______
Demand has changed from 300 to 640 change =______
The percentage change in demand 340 ÷ 300 x 100 = _____