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Price Elasticity of Demand

Price Elasticity of Demand. Can you… Define and calculate it? Show how useful it is to firms, Governments, and Consumers?. What is it. What shape is the Demand curve? Is it…. P. D1. D2. D3. Q. Elasticity. The slope of the curve shows its elasticity*

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Price Elasticity of Demand

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  1. Price Elasticity ofDemand Can you… Define and calculate it? Show how useful it is to firms, Governments, and Consumers? IGCSE ECONOMICS

  2. What is it • What shape is the Demand curve? Is it… P D1 D2 D3 Q IGCSE ECONOMICS

  3. Elasticity • The slope of the curve shows its elasticity* • It is calculated by: % change in quantity % change in price *This is not strictly speaking true, but will do to start with. IGCSE ECONOMICS

  4. What is it? • It is “How responsive demand is to a change in price.” • SO, when price changes, does demand change by only a little or is it by a lot? IGCSE ECONOMICS

  5. Interpreting our results • If you have an answer > 1, then demand is very sensitive to price, this means a small change in price leads to a BIG change in demand • Demand is said to be PRICE ELASTIC. IGCSE ECONOMICS

  6. Interpreting our results • If you have an answer < 1, then demand is very in-sensitive to price, this means a BIG change in price leads to only a small change in demand • Demand is said to be PRICE INELASTIC. IGCSE ECONOMICS

  7. Interpreting our results • If you have an answer = 1, then demand is said to have unitary elasticity. • Price and demand change in the same proportions. IGCSE ECONOMICS

  8. At the extremes • It is possible to get an answer of 0. • This is called Perfectly inelastic demand • What will happen to demand if price is raised by any amount? IGCSE ECONOMICS

  9. At the extremes • It is possible to get an answer of infinity. • This is called Perfectly elastic demand • What will happen to demand if price is raised by any amount? IGCSE ECONOMICS

  10. Revenue • To work out the revenue of the company you need to : Multiply the Qty with the Price, • In your answer this should be shown to illustrate the difference in revenue after the change in price. IGCSE ECONOMICS

  11. Worked examples Now, try the worked examples from the worksheet. IGCSE ECONOMICS

  12. So what? • Should a business with elastic demand put up or lower its prices? • Should a business with in-elastic demand put up or lower its prices? • Draw diagrams to show this IGCSE ECONOMICS

  13. Price Elasticity and Revenue • The firm sells 500 products at $70. The price increases to $75 and the number of products sold falls to 450. • The firm sells 1200 products at $44. The price decreases to $37 and the number of products sold increases to 1365. What happens to revenue in each of these cases? What is the PED in each of these cases? IGCSE ECONOMICS

  14. Answers Price increase 7.14% Quantity decrease 10% Revenue was: $35,000 Revenue now: $33750 Elasticity: 1.4 ELASTIC Price decrease:15.9%Quantity increase: 13.8% Revenue was: $52,800 Revenue now: $50505 Elasticity: 0.8 INELASTIC IGCSE ECONOMICS

  15. What makes demand more elastic? • Availability of substitutes • Strength of brand image • Time IGCSE ECONOMICS

  16. Questions • One of the exam papers (P4) requires you to answer an essay style question. • This means we need to practice this! • See hints on how to write essays. IGCSE ECONOMICS

  17. Questions to answer • a. Explain why the price elasticity of demand for foreign holidays is likely to be elastic. • b. What would be the consequences of an appreciation of the UK exchange rate (price increase) on UK firms that supply these foreign holidays? IGCSE ECONOMICS

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