1. 124 Price Elasticity of Demand AS Edexcel New Specification 2015 Business By Mrs Hilton for

3. Lesson Objectives To be able to calculate PED Interpret PED results Discuss the factors that influence demand Discuss the significance of price elasticity of demand to businesses in terms of implications for pricing Calculate and interpret the relationship between price elasticity of demand and total revenue To be able to answer sample exam questions based on the topic area

4. Guidance from Edexcel

5. From the specification a) Calculation of price elasticity of demand b) Interpretation of numerical values of price elasticity of demand c) The factors influencing price elasticity of demand d) The significance of price elasticity of demand to businesses in terms of implications for pricing e) Calculation and interpretation of the relationship between price elasticity of demand and total revenue a) Calculation of price elasticity of demand b) Interpretation of numerical values of price elasticity of demand c) The factors influencing price elasticity of demand d) The significance of price elasticity of demand to businesses in terms of implications for pricing e) Calculation and interpretation of the relationship between price elasticity of demand and total revenue

6. Starter What do you think PED stands for? 1.Price elastic demand 2.Product elastic demand 3.Priced elastic demanded 4.Price elasticity of demand 5.Productivity elastic demand

7. Going to need a calculator for this activity (click for online calculator)

8. Elastic? Inelastic – demand does NOT change with price (e.g. petrol, even if price goes up or down we still need same quantity) Elastic – demand does change with price, if we drop the price of a product then demand should rise Nothing to do with knickers Or elastic bands

9. Factors influencing PED If it is a luxury good or a necessity, luxury items tend to be more elastic Substitutes – if there are no or few substitutes then prices are inelastic (Madonna tickets) Perfectly inelastic (0 PED ) e.g. insulin Will consumers try new products (in addictive products such as cigarettes) Incomes of consumers

10. Relationship between PED and Total revenue Inelastic goods (Petrol) when price increases total revenue increases when price decreases total revenue decreases which is why petrol stations don’t have sales. Elastic when price goes up total revenue decreases (less customers buying so less revenue made), when price falls the total revenue increases, so worth having a sale to make more revenue.

11. Ooo goody a formula To calculate the price elasticity of demand we use a formula, PED =: % change in Q demanded __________________________________ % change in price

12. Definition of PED How sensitive demand for a product or service is to a change in price Formula is:

13. PED Values If PED when calculated is : 0 this means it is perfectly inelastic <1 this means it is inelastic 1 this means it is unit elastic >1 this means it is elastic Inelastic product is petrol, with a PED of 0 or 0.5

14. PED practice 1 How elastic is the demand for Susan’s Sunglasses that she sells? If the price rises from £40 to £60 then she sells 45% less. Calculate PED and comment on the elasticity of demand.

15. PED practice 1 - answer Calculate the % change in price first which is Price new – Price old Price old x 100 40-60/60 x100 = 33% Then % change in Q / % change in P -45/33 x100 = -1.36 >1 means that the demand is elastic

16. PED practice 2 Bob drops the price of tea bags in his shop by 10% which has caused a 20% rise in demand. Calculate the PED and comment on the elasticity of the demand.

17. PED practice 2 answer 1.First calculate PED (straightforward) Q/P +20 / -10 -2 2. Now interpret the results Value is >1 therefore demand for the tea bags is elastic. Bob can put them on sale and he will sell more.

18. PED practice 3 What if we already know the PED value can we work backwards (the chief examiner wouldn’t do that to us?) PED of product X is -0.4 Product X was £30 now £33 Calculate change in quantity demanded

19. PED practice 3 - answer 1.Calculate the % change in price Price new – Price old Price old x 100 33-30/30 x100 = (-10%) 2. Now calculate change in Quantity Demanded (-0.4) x (-10%) = (-4%)

20. Plenary Quiz PED Plenary quiz here:here

22. Sample question 1 Case study on next slide 1 mark for stating the formula 3 marks for making the calculation

24. Answer question 1 Knowledge 1 mark for stating the formula Calculation 3 marks: Step 1 – what do we know? – We know from the question that the PED value is (-0.8) – We know from the case study that the original price was £20 – We know from the question that the price has risen by £3

25. Step 2 Find the % change in price: Price new – Price old Price old x 100 23-20 20 X 100 3 20 x 100 15%

26. Step 3: Calculate % change in quantity demanded (-0.8) x 15% (-12)% The final answer is: (-12)%

27. Sample question 2 Case study and Extract F on next two slides Remember you are practicing using PED, so just look at that aspect of the answer, you may need to motor straight through to the answer to help you…

30. Answer question 2 This is a 20 mark answer – for this PPT just focus on how you could use PED: Income inequality in China and India could result in a much lower PED than the US Demand in Chinese, Indian or US markets is likely to be price inelastic (as goods aimed at individuals with high income)

31. Sample question 3 8 mark question Case study on next slide

33. Answer question 3 Factors that may affect the PED for Nando’s Location of restaurants to rivals such as KFC Providing better quality fast food than KFC will make demand less elastic (prevent customers choosing a KFC instead) Competition – customers may be tempted by lower prices of KFC PED may be low if the Nando’s chicken is better

34. Revision Video

35. Formula round up PED: % change in Q demanded __________________________________ % change in price % Change in price Price new – Price old Price old x 100

36. Another revision video ( although this man may drive you mad )