Price elasticity of demand (PED) Price increases by 10% Demand falls by 13% PED is price elastic as the fall in demand is greater than the fall in price. Price elastic demand means that a change in price will lead to a more than proportional change in demand i.e. demand is sensitive to price changes Price inelastic demand means that a change in price will lead to a less than proportional change in demand i.e. demand is not so sensitive to changes in price How price inelastic can a cheese sandwich really be? http://money.aol.co.uk/2015/06/10/introducing-the-world-s-most-expensive-sandwich/?icid=maing-grid7|ukt2|dl4|sec1_lnk3%26pLid%3D360847 Introducing the world's most expensive sandwich Can you think of products that are likely to be highly price elastic and some that are likely to be highly price inelastic?

Price elasticity of demand The responsiveness of demand to a change in price. Calculated by: % change in quantity demanded % change in price

Price elasticity of demand (PED) In business it is assumed that the PED will always be negative i.e. price and demand will always move in the opposite direction If PED is between 0 and -1 e.g. -0.7 then demand is price inelastic If PED is more than -1 e.g. -1.4 then demand is price elastic http://www.bbc.co.uk/sport/0/football/29614980 Price of Football: Ticket increases outstrip cost of living Why can premier league football clubs charge such high prices for tickets?

Product with price elastic-demand Product with price-inelastic demand Characteristics (Is it unique?) Impact of a price cut Numerically Impact of a price rise

Factors influencing PED http://uk.businessinsider.com/coca-cola- new-fairlife-milk-product-price-2015- 2#ixzz3eHZSI200 QPR's unexpected ticket hike http://news.bbc.co.uk/1/hi/england/762 6412.stm Wind power demand spirals http://news.bbc.co.uk/1/hi/business/756 4623.stm

What is the impact on change in price on revenue? Business people want to know how a change in price will impact on revenue This will help determine whether changing price is a good or bad marketing decision Price elastic demand Price inelastic demand Raise selling price Sales revenue will decrease Sales revenue will increase Lower selling price

The significance of PED Price inelastic – if a product is price inelastic then a firm knows that if it raises price, even though demand will fall, total revenue will increase. This can be shown mathematically. Price = £1.00 Demand = 100 units What is total revenue? Price x demand £1.00 x 100 units = £100 PED = - 0.5 Should the firm raise price? If the firm were to raise price by 10 pence, from £1.00 to £1.10, this is a 10% price rise (10%). Using the PED formula: % change in Qd = - 0.5 10%

The significance of PED Rearrange the formula: -0.5 x 10% = 5% There is a 5% change in demand PED is –ve therefore in this case when price goes up by 10% demand goes down by 5% Demand will go down from 100 units to 95 units What is total revenue? Price x demand £1.10 x 95 units = £104.50 By raising the price of a price inelastic product the firm has increased TR. TR will fall if the firm attempts to lower price.

The significance of PED Laptops4u sold 1000 laptops in 2015 at a price of £400 each. In 2016 they decided to reduce their laptop price to £350. Their price elasticity of demand was -2. Are Laptops4u’s laptops price elastic or price inelastic? What was the total revenue in 2015? What was the percentage change in price in 2016? What was the percentage change in demand in 2016? What was the new revenue on 2016? Was it a good or bad idea to change price from a financial viewpoint?

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