1. Price elasticity of demand
© Hodder & Stoughton Limited 2015

2. Price elasticity of demand
Definition and formula
Factors that determine elasticity
How might a business use elasticity?
AS/Year 1 Microeconomics © Hodder & Stoughton Limited 2015

3. Price elasticity of demand (PED)
PED is a measure of the responsiveness of quantity demanded to a change in price
Formula:
percentage change in quantity demanded %∆QD
percentage change in price %∆P
AS/Year 1 Microeconomics © Hodder & Stoughton Limited 2015

4. What factors determine the PED?
Proportion of income that a good costs
Whether the good has many close substitutes or not
Whether the good is habit forming or a necessity
Time — how long has it been since the change in price?
AS/Year 1 Microeconomics © Hodder & Stoughton Limited 2015

5. How can a business use elasticity?
What if a business needs to raise the price of a good?
What if a business wants to raise the revenue it receives?
total revenue is calculated using price × quantity
if demand is relatively price elastic, then if the firm raises prices, it will lose proportionately more demand and therefore revenue falls
price elastic — price rises therefore revenue falls
if demand is relatively price inelastic, then if the firm raises prices, it will lose proportionately less demand and therefore revenue rises
price inelastic – price rises therefore revenue rises
AS/Year 1 Microeconomics © Hodder & Stoughton Limited 2015

6. How can a business use elasticity?
AS/Year 1 Microeconomics © Hodder & Stoughton Limited 2015