Price elasticity of demand © Hodder & Stoughton Limited 2015

Price elasticity of demand Definition and formula Factors that determine elasticity How might a business use elasticity? Theme 1 © Hodder & Stoughton Limited 2015

Price elasticity of demand (PED) PED is a measure of the responsiveness of quantity demanded to a change in price Formula: percentage change in quantity demanded %∆QD percentage change in price %∆P Theme 1 © Hodder & Stoughton Limited 2015

What factors determine the PED? Proportion of income that a good costs Whether the good has many close substitutes or not Whether the good is habit forming or a necessity Time — how long has it been since the change in price? Theme 1 © Hodder & Stoughton Limited 2015

How can a business use elasticity? What if a business needs to raise the price of a good? What if a business wants to raise the revenue it receives? total revenue is calculated using price × quantity if demand is relatively price elastic, then if the firm raises prices, it will lose proportionately more demand and therefore revenue falls price elastic — price rises therefore revenue falls if demand is relatively price inelastic, then if the firm raises prices, it will lose proportionately less demand and therefore revenue rises price inelastic – price rises therefore revenue rises Theme 1 © Hodder & Stoughton Limited 2015

How can a business use elasticity? Theme 1 © Hodder & Stoughton Limited 2015