1. SECTION A: THE MARKET SYSTEM
Part 1 Demand and Supply
Chapter 10: Applications of elasticity
Edexcel International GCSE Economics

2. Getting Started…
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

3. Applications of Elasticity
This price change will have an effect on demand.
If there is a change in demand, there will be a change in total revenue.
Firms can use elasticity to decide on prices
Governments can use elasticity to target goods for indirect taxation.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

4. Price Elasticity and Firms
Total Revenue = Price x Quantity
Price= 20 Quantity = 30 TR = 600
Price= 22 Quantity = 25 TR = 550
Is the PED of this good elastic or inelastic?
ELASTIC
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

5. Price Elasticity and Firms
TR = P x Q
Price = 20 Q = 30 TR = 600
Price = 25 Q = 29 TR= 725
Is the PED of this good elastic or inelastic.
INELASTIC
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

6. Total Revenue Price Inelastic and Decrease in Price = Fall in TR
Price Inelastic and Increase in Price = Rise in TR
Price Elastic and Decrease in Price = Rise in TR
Price Elastic and Increase in Price = Fall in TR
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

7. Question 1 – Simmons Ltd - pg 38
(a) Demand for Crackles is elastic. The value of price elasticity for the product is –1.5, i.e. greater than 1.
If demand for a product is elastic, a price reduction will result in an increase in total revenue.
(c) Total revenue before the price change is given by:
TR = 25p x 5,000,000 = £1.25m
Total revenue after the price change is given by:
TR = 20p x 6,500,000 = £1.3m
(d) The price reduction from 25p to 20p has resulted in an increase in total revenue of £50,000 (from £1,250,000 to £1,300,000). This was to be expected since demand for Crackles is elastic.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

8. Unitary Elasticity TR is the same at every price £10 x 50
£5 x 100, etc
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

9. Income Elasticity and Firms
Product Switching – flexible resources can be used to make other products if the demand is more income elastic (plastic household good to plastic toys)
Production Planning – if incomes are expected to rise, firms can plan to increase production. Producers of inferior goods can build capacity if a recession is coming.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

10. Price Elasticity and the government
Indirect taxes (VAT, excise duties).
Choose products that have Inelastic demand.
Target goods which are either necessities or have few substitutes.
But not goods necessary for survival.
Unless you are the boss of Nestle...
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

11. Question 2 – Petrol and Indirect taxes - pg 40
(a) (i) There are two taxes on petrol in the UK. Excise duty is 50.35p per litre and VAT is 17.13p per litre. Therefore the total tax is 67.48p. This represents 58.7 per cent (67.48/115 x 100) of the total price per litre. (ii) More than half of the money generated from the sale of petrol is taken by the government. Most would agree that this seems rather a lot! (b) The government imposes indirect taxes on a range of goods and services. However, certain goods are targeted very aggressively. These will be goods which have inelastic demand. This is because consumers will avoid heavily taxed products if demand for them is elastic. Therefore, governments target goods like petrol which are either necessities or have no substitutes. However, most governments do not target goods such as food and water, which are essential to human survival.
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

12. Economics in Practice – MaxiPop
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

13. Chapter Review: ActiveBook
Chapter 10 quiz
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity

14. Key words – Income Elasticity of Demand
Unitary easticity
Add these to your Key words glossary and learn them!!
SECTION A: The Market System | Part 1: Demand and Supply | Chapter 10: Applications of Elasticity