Price elasticity of demand (PED) (1) Lesson aims: To be able to calculate price elasticity of demand for a good To understand the meaning of a good being price elastic and inelastic To be able to draw a perfectly elastic and perfectly inelastic demand curve You may be able to calculate elasticity using alternative formulae You may understand what is meant by unitary elasticity

Starter (3 minutes): l What is demand? l What normally happens to demand when the price increases? l Decreases?

Recap l What is a complement? l Examples? l What is a substitute? l Examples? l What is derived demand? l Examples? l What is composite demand? l Examples? l What is joint supply? l Examples?

Price elasticity of demand l Price elasticity of demand is the responsiveness of demand to a change in price l If the demand changes a lot (more than proportionately) to a change in price, it is said to be elastic in demand l If the demand changes less than proportionately (a smaller amount) than the change in price, it is inelastic in demand

Elasticity The Formula: Ped = % Change in Quantity Demanded ___________________________ % Change in Price If answer is between 0 and -1: the relationship is inelastic If the answer is between -1 and infinity: the relationship is elastic Note: PED has – sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand)

Question 1, p.67 (10 minutes)

Alternative formulae l To calculate price elasticity of demand, you need to calculate percentage changes; l They can be calculated taking the % out by just calculating the changes l Read the top left of page 68 and the Fig.1 examples to help you understand this

Question 2, p.68 (10 minutes)

Perfectly elastic demand

Perfectly inelastic demand

Unitary elasticity

Draw each of the three models and write an explanation for each

So… l What is price elasticity of demand? l What is the formula to calculate price elasticity of demand? l What is elastic demand? l What is inelastic demand?