PRICE ELASTICITYOF DEMAND

WHAT IS PRICE ELASTICITY OF DEMAND?

Price Elasticity measures how responsive demand is to changes in price.

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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?

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An Elastic Demand Curve

EXPLAIN THE CHANGE IN PRICE AND QUANTITY.. PRICE DROPS FROM $300 TO _____ DEMAND INCREASES FROM _________ TO ____________

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Effects on revenue:

₤300 x 300 = ₤ 90,000

₤200 x 620 = ₤ 125,000

Extension

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An Elastic Demand Curve

A small increase in price by ₤50 results in a sharp fall in quantity demanded.

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Calculating % Change $300 to $350 in % is CHANGE / ORIGINAL X 100

50/ 300 = 16.6% +

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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.

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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.

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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

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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

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Calculate the;a)% change in Priceb)% change in QDc)Price elasticity of

demand d)Is product Elastic or

Inelastic?

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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

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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.

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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%

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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.

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Price elasticity and company revenue

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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.

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A demand curve is Inelastic when___________________________________________________________________________________________________________________________________________________________________________________________________

Price elasticity =

To calculate a percentage change in demand:

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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 = _____