ELASTICITY

Price Elasticity of Demand

Elasticity: a measure of the sensitivity of one variable to changes in another variable. Elasticity = % change in dependent variable % change in independent variable

Go to kahoot.it Elasticity Quiz

Types of Elasticity Price elasticity of demand Income elasticity of demand Cross elasticity of demand Price elasticity of supply

Price Elasticity of Demand Dependent variable = quantity demanded Independent variable = price Price elasticity of demand: measures the percentage change in demand for a product following a change in its price. Ped = % change in quantity demanded % change in price PED = %  Q %  P

You have to Q up... _________________ To P down…

C PED = ____0___Q_ 0 P

5 possible values for PED… 1. If % ∆ Q > % ∆ P ratio will be GREATER THAN 1 product is ELASTIC E.g. a 20% rise in the price tomatoes (R1 - R1.20) leads to a larger fall in quantity demanded from 150 units to 100 (50%) Calculate the PED…

2. If % ∆ Q < % ∆ P ratio will be LESS THAN 1 product is INELASTIC E.g. a 50% rise in price from R10 to R15 leads to a smaller fall in sales (demand) form 100 units to 80 (20%). Calculate the PED…

3. If % ∆ Q = % ∆ P ratio will be EQUAL TO 1 product is UNIT ELASTIC E.g. price increases by 50%, demand decreases by 50%. Calculate the PED…

4. If PED = 0 Change in price has no effect Perfectly Inelastic Demand curve will be ___________

5. If PED = ∞ Rise in price will cause demand to fall to 0 Perfectly Elastic Demand curve will be ___________

Perfectly inelastic = 0 Inelastic = from 0 - < 1 SUMMARY Perfectly inelastic = 0 Inelastic = from 0 - < 1 Unitary elastic = 1 Elastic = >1 Perfectly elastic = ∞

What Determines Price Elasticity of Demand? Number of close substitutes

2. Uniqueness of the product My hockey shirt vs. my brother’s hockey shirt! 3. Degree of complementarity of a good/service Complementary goods tend to have a low PED IPhones ITunes Games consoles Games Golf clubs Golf balls Cars Car parts

4. The cost of switching between different products 24 month contracts

5. Luxury or necessity

6. The time period allowed following a price change Petrol price increase very inelastic in ST LT – people switch to fuel efficient/electric cars – demand becomes more elastic. Impulse buys very inelastic

7.  The % of a consumer’s income allocated to spending on the good

8.  Habit forming goods

9. Peak and off-peak demand Cell phones call charges Rail/airfares (school holidays) Internet charges

10. Advertising and brand loyalty

Price elasticity of demand and total revenue for a producer

What happens to total revenue? Change in the market What happens to total revenue? Ped is inelastic and a firm raises its price. Total revenue ________ Ped is elastic and a firm lowers its price. Ped is elastic and a firm raises its price. Ped is 1.5 and the firm raises its price by 4% Ped is 0.4 and the firm raises its price by 30% Ped is 0.2 and the firm lowers its price by 20% Ped is 4.0 and the firm lowers its price by 15%

Changing elasticities along a demand curve