Elasticity…..how much do consumer’s react?

The concept of elasticity Intro to Elasticity The concept of elasticity Has the London congestion charge reduced traffic flows and congestion? Will most people still fly if there is a new aviation fuel tax?

Price elasticity of demand Intro to Elasticity Price elasticity of demand Why is elasticity of demand important for Stelios?

Intro to Elasticity Elasticity of Demand Why do hotels lower room-rates at weekends and why do car rental firms charge lower prices at weekend?

Cut-throat competition? Intro to Elasticity Cut-throat competition? Gillette – the manufacturers of the Mach 3 razor - controls over 70 per cent of the world's wet shave razor market and takes 90 per cent of the $1.5 billion annual global profits If the price of Mach3 razors went up by 20% - would you still buy them?

By how much does demand fall? Elasticity – the concept Elasticity is the responsiveness of one variable to changes in another E.g. When price rises what happens to demand? BUT…. By how much does demand fall? Demand falls

Elasticity – the concept If price rises by 10% - what happens to demand? We know demand will fall By more than 10%? By less than 10%? Elasticity measures the extent to which demand will change Elastic Inelastic

There are 4 types of elasticity Price elasticity of demand Price elasticity of supply Income elasticity of demand Cross elasticity We will cover these over the next 3 weeks!

Price Elasticity of Demand Intro to Elasticity AS Economics Price Elasticity of Demand

They all have differing levels of elasticity The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded. Price (£) They all have differing levels of elasticity Quantity Demanded

Elastic V Inelastic Price Elasticity of Demand Intro to Elasticity Elastic V Inelastic Price Elasticity of Demand The responsiveness of demand to changes in price Where % change in demand is greater than % change in price – elastic Where % change in demand is less than % change in price - inelastic

To your work sheet & Calculators!

Your worksheet…. Use a calculator! Question % change in Price % change in Qty Demanded Elasticity Type of elasticity A 10 20 =20/10 = B 50 25 =25/50 = C 7 28 D 9 3 E 5 F 60 G 8 4 H I J 11 K 15 % change in D > % change in P = elastic % change in D < % change in P = inelastic

% change in Qty Demanded The ANSWERS… Question % change in Price % change in Qty Demanded Elasticity Type of elasticity A 10 20 =20/10 = 2 Elastic B 50 25 =25/50 = 0.5 Inelastic C 7 28 4 D 9 3 0.33 E 5 2 F 60 G 8 0.5 H 1 ??? I 0.71 J 11 0.73 K 15 What do you notice about the numbers and the type of elasticity? UNITARY PERFECT INELASTIC

Elasticity The Formula: % Change in Quantity Demanded ___________________________ Ped = % 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)

Values for elasticity of demand Intro to Elasticity Values for elasticity of demand If Ped = 0 then demand is perfectly inelastic - demand does not change when the price changes If Ped is between 0 and 1 then demand is inelastic If Ped = 1 then demand is said to unit elastic If Ped > 1, then demand responds more than proportionately to a change in price – i.e. demand is elastic Elasticity of demand measures the responsiveness of demand to changes in price Where the % change in demand is greater than % change in price – demand is elastic Where the % change in demand is less than % change in price – demand is inelastic

Elasticity through Demand curves

Intro to Elasticity An inelastic demand Price Quantity Demanded

An inelastic demand Price £200 400 Quantity Demanded Intro to Elasticity An inelastic demand Price £200 400 Quantity Demanded

An inelastic demand Price Total revenue = price x quantity = £80,000 Intro to Elasticity An inelastic demand Price Total revenue = price x quantity = £80,000 £200 400 Quantity Demanded

An inelastic demand Price Total revenue = price x quantity £400 Intro to Elasticity An inelastic demand Price Total revenue = price x quantity £400 = £140,000 £200 350 400 Quantity Demanded

An inelastic demand Price % change in demand = £400 Intro to Elasticity An inelastic demand Price % change in demand = Was 350 and is now 400 = 50 / 350 x 100 = 0.14 x 100 = 14% £400 £200 350 400 Quantity Demanded

An inelastic demand Price % change in demand = 14% % change in price = Intro to Elasticity An inelastic demand Price % change in demand = 14% % change in price = £200 - £400 = 200/200 = 1 1x100 = 100% change in price £400 £200 350 400 Quantity Demanded

An inelastic demand Price % change in demand = 14% Intro to Elasticity An inelastic demand Price % change in demand = 14% % change in price = 100% Price elasticity of demand = 14 / 100.0 =0.14 (inelastic) £400 £200 350 400 Quantity Demanded

An elastic demand curve Intro to Elasticity An elastic demand curve Price £200 400 Quantity Demanded

An elastic demand curve Intro to Elasticity An elastic demand curve Price £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £80,000 £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £80,000 Total revenue when price = £100 = £120,000 £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Price elasticity of demand % change in demand = % change in price = £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Price elasticity of demand % change in demand = 200% % change in price = 100% Formula = 200 100 £200 £100 400 1200

An elastic demand curve Intro to Elasticity An elastic demand curve Price Price elasticity of demand = -2 (elastic) % change in demand = 200% % change in price = 100% £200 £100 400 1200

Perfectly inelastic demand curve Intro to Elasticity Perfectly inelastic demand curve Price £400 £300 £200 600 Quantity Demanded

Perfectly elastic demand curve Intro to Elasticity Perfectly elastic demand curve Price £200 400 1200

Your go again… Elastic = customers will react more to a change in price Inelastic = customers will react less to a change in price

Elastic or inelastic demand? Intro to Elasticity Elastic or inelastic demand? What would happen to demand if prices went up by 25%? A Sony portable PlayStation Household electricity

Elastic or inelastic demand? Intro to Elasticity Elastic or inelastic demand? A tall latte from Costa Coffee from a railway station vendor A pound of pork sausages from a local market

Elastic or inelastic demand? Intro to Elasticity Elastic or inelastic demand? Precision steel used in the construction of new office developments A new kitchen bought from B&Q

Elasticity Questions…are these products Price Elastic or Inelastic? Gateway cuts the price of their desktop PCs by 10% A fall in the price of Euro-star tickets An increase in the price of the Financial Times A taxi home from a night-club on a Friday night A rise in average car insurance premiums Motorway petrol prices rise by 5% after the budget Vodafone cuts their mobile phone charges The price of central heating oil rises by 20% due to a rise in world oil prices A local leisure club decreases monthly charges by 15% in a bid to increase the number of members

Homework….

Homework CD Textbook p45 – 50 Read up on Elasticity of Demand.

Plenary - Elastic or Inelastic ? Price increase by 10% and demand falls by 30%... Price elasticity of demand is ?????? Elastic

Plenary - Elastic or Inelastic ? Price increase by 10% and demand falls by 8%..... Price elasticity of demand is ?????? Inelastic

Plenary - Elastic or Inelastic ? Price increase by 10% and demand falls by 10%... Price elasticity of demand is ?????? Unitary Elastic

Plenary - Elastic or Inelastic ? Price increase by 10% and demand falls by 0%... Price elasticity of demand is ?????? Perfectly Inelastic