1. SECTION A: THE MARKET SYSTEM
Part 1 Demand and Supply
Chapter 7: Price elasticity of demand
Edexcel International GCSE Economics

2. Getting Started…
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

3. What is price elasticity of demand?
How the change in price affects the change in quantity demanded.
The responsiveness of demand to a change in price
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

4. Price inelastic demand
Product A
Price decreases from £10 - £8 (20%)
Demand increases from 100 – 110 (10%)
And vice versa
Change in price results in a proportionately smaller change in demand
PEAK RAIL TRAVEL
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

5. Price elastic demand Product B Price decreases from £10 - £8 (20%)
Demand increases from 100 – 150 (50%)
And vice versa
Change in price results in a proportionately larger change in demand
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

6. Question 1 – Demand curve – pg25
(a) If the price rises from $5 to $6, demand for the product in Figure 2 will fall from 3,000 units to 2,000 units. (b) Demand for goods that are price elastic are responsive to price changes. In this case, price has been increased by 20%, from $5 to $6. However, the change in demand has been even greater. Demand fell by a massive 50%. This is what would be expected for goods with elastic demand. A change in price brings about an even bigger percentage change in demand.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

7. The value of PED PED = % change in quantity demanded % change in price
What is the PED of product A and product B from the earlier example?
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

8. Interpreting the value of elasticity
0 – perfectly inelastic demand
< 1 – demand is inelastic
1 – unit elasticity (% change in price = % change in demand)
> 1 – demand is elastic
∞ - perfectly elastic demand
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

9. Perfectly inelastic demand
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

10. Perfectly elastic demand
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

11. Question 2 – PED – pg27
(a) The value of price elasticity for product A is –0.4. It is less than –1 and therefore price inelastic. The value of price elasticity for product B is –2.3. It is greater than –1 and therefore price elastic. The value of price elasticity for product B is –6.5. It is greater than –1 and therefore price elastic. (b) Products which are price inelastic tend to have a steep demand curve. In this case, demand for product A is price inelastic. Therefore the demand curve for product A will be the steepest. (c) Demand for product C is the most price elastic. This means that demand is very responsive to price changes. If there was a sharp increase in the price of product C there would be an even greater decrease in demand.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

12. Factors affecting PED Availability of substitutes Degree of necessity
Proportion of income spent on a product
Time period
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

13. Availability of substitutes
Factors affecting PED
Availability of substitutes
More substitutes = More elastic demand.
Increase in Price = People buy the substitute.
Examples
Strawberry jam (buy raspberry, apricot jam instead)
Cheap smart phones (buy a different brand)
Kebabs (buy a sausage, chips instead)
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

14. Degree of necessity Examples Factors affecting PED
If goods are essential = Inelastic Demand
You need them so you have buy them even if the price increases
Examples
Basic foods (bread, rice, milk)
Fuel
Luxury goods (boats, holidays – inessential, more elastic)
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

15. Proportion of income spent
Factors affecting PED
Proportion of income spent
Expensive goods = need higher proportion of income – therefore more elastic.
Inexpensive goods = smaller proportion of income – therefore more inelastic.
Examples
Expensive (TVs, cars)
Inexpensive (Stamps, pencils)
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

16. Time period Examples Factors affecting PED
Short run – goods are inelastic. It takes time to find substitutes.
Long run – demand is more elastic. You can find alternatives, change your behaviour.
Examples
Petrol increases in price, keeps increasing – over time people use their cars less, use public transport, go by bike.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

17. ELASTIC OR INELASTIC?
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

18. Economics in practice: PED for oil
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

19. Chapter Review: ActiveBook
Chapter 7 quiz
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve

20. Price elasticity of demand
Chapter 7 – Key terms
Elastic demand
Inelastic demand
Price elasticity of demand
Add these to your Key words glossary and learn them!!
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 4: The Supply Curve